Hidden fees. Some advisors have moved to charging fees instead of commissions. Fees are usually a set percentage of funds managed for clients, usually about 1 percent a year. It's led to a war of words over whose fee structure is best. Don't get caught in the crossfire. It's complicated. Big fund companies make a lot of money on the cash and investments they manage, just as banks have always done. Each company differs on how it shares those trading profits. What matters is the net amount you pay, which is a figure companies must disclose. Investment advisors and firms are required to disclose fees and commission arrangements to regulators, but sometimes they give the information selectively to prospective clients. New Jersey English teacher Laurie Albanese says when she shopped for a financial advisor, "They all said their fees were lower and that their competitors charged hidden fees. It got so annoying. I didn't believe any of them."
Compound rates. The simple economic truth is that an interest-rate investment that reinvests the yield, including most money market funds and certificates of deposit, grows at a mathematically faster rate. But it doesn't apply to other kinds of investments. Stock prices go up and down. They don't get any direct benefit from compounding interest. But that doesn't stop financial advisors from making the claim.
Headwinds. When investments are under pressure, this is a favored buzzword. It's supposed to work like the calm voice of the airline pilot saying, "We're going to be experiencing a bit of turbulence for a few minutes up ahead here." Financial advisors will also borrow pilot-speak for the opposite effect: Tailwinds means it's a good investment. But wind factors are a lot easier to measure than economic factors. So be wary when they are used to explain investments.
Risk. To be sure, everyone wants to make money and no one wants to lose it. Regulators have clamped down on investment managers' unproven guarantees of positive returns, but have said less about the risk-related claims, which can also be misleading. "I manage my own risk," Albanese says. "If I don't understand it, I don't buy it."
Large cap (and mid cap, and small cap). An explosion of new funds has created a Babel of names. But fund companies each use their own definitions in naming fund categories. It's confusing for investors, and funds don't always fit into neat boxes. For example, small-cap funds that hold fast-growing stocks can really be a mix of small- and mid-cap stocks. The only way to know what you are buying is to read the fund prospectus and scour a fund's holdings. But most people reading them "won't have a clue what they are all about," Webb says. If you don't feel like mastering that essential homework, you're probably better off sticking to broad index funds, he says.
[Read: The New Science of Stock Charts.]
Alpha. It's what everyone wants, in a sense, and it's probably the ultimate investing buzzword. It's defined as the measure of how much your investment outperforms the averages, also known as benchmarks (it can also measure underperformance, but the buzzword usually refers to positive returns). Beta is a similar term. It measures how volatile a stock is versus the average. They are both based on past performance, so they only tell you so much.
There was serious buzzkill for "alpha" two years ago when savvy Goldman Sachs posted big losses and shut its highly touted Global Alpha hedge fund, which once had $16 billion in assets. Still, new "alpha" funds have been launched, and advisors continue to use alpha as a term of endearment. It shows the danger of buying into buzzwords: They might have a long shelf life, but it doesn't mean they don't eventually go stale.