The investing world is full of jargon. Even for the experienced investor, the terminology can be intimidating and confusing – leading to needless risk aversion or misinformed decisions.
In this guide, our Burnley financial planners identify five crucial investing terms you should know as you build your portfolio in 2025.
We explain everything in simple language (without diluting the key nuances) so you can navigate the headlines and market landscape with greater confidence.
#1 Diversification
Should you invest everything in one company? Most would (rightly) say no. After all, what if that company fails? You could lose all of your money.
A better approach would be to spread out your capital across multiple companies. For instance, suppose you invest in 100 different firms. Even if one of them fails, the others might keep your portfolio growing overall if they continue to perform.
This is known as diversification. It’s the practice of spreading out your risk and avoiding putting all of your eggs in one basket. Whilst diversification does not guarantee success or profits, it is a great way to manage risk – regardless of your investment goals.
#2 Compound interest
Albert Einstein once said that compound interest is the “Eighth wonder of the world”. Moreover, the person who understands it “earns it”.
There is good reason for this description. It describes the “snowball effect” of piling interest upon interest. The longer you have for the snowball to accumulate, the more rapidly it grows.
For example, suppose you invest £10,000 in a portfolio and earn an average 7% annual return. Over 20 years, the portfolio might eventually hold around £40,000. However, over 40 years, it could hold £163,000 (nearly 3.5x the amount at Year 20, but in 2x the time).
This dynamic highlights the importance of starting early as an investor – especially for long-term goals like building a retirement fund. However, it is never too late to start investing!
#3 Asset allocation
Many people approaching a financial adviser for the first time have built up some savings in a regular savings account. This is a specific asset type – i.e. cash. However, there are many other asset types that you can use to build wealth.
Another one is property, such as Buy to Let. However, other common ones include fixed-income securities (e.g. UK government bonds, or “gilts”) and equities (e.g. shares on the London Stock Exchange, or LSE).
Asset allocation refers to how you divide your money across these different types of investments (or asset classes). The allocation you chose will depend on multiple factors, such as:
- Your time horizon (how long until you need the money).
- Your risk tolerance.
- Your investment goals (e.g. do you want to grow wealth or take an income?)
- Your values, interests and preferences.
- And more.
A financial adviser can help you discern the best asset allocation in light of the above. Over time, your asset allocation might change due to market conditions – requiring occasional work to rebalance. Consider a new asset allocation in the future if your goals/needs change.
#4 Funds
What’s the best way to invest in multiple companies or asset types/classes? One option is to do this directly – e.g. pick individual stocks and commit money to each one. However, another way is to invest using funds.
A fund allows investors to pool their money. This is then invested to buy a diversified portfolio of investments (e.g. stocks, bonds or other assets) based on the fund’s specific strategy or goal.
This takes away the pressure and time commitment to pick individual stocks or bonds yourself. It also lowers the financial barrier to entry for investors. For instance, some stocks have a very high share price. Yet, by investing in them indirectly via a fund, they become more accessible.
#5 Risk tolerance
How much risk are you (personally) comfortable with, when it comes to investing? Your “risk tolerance” refers to your ability to stomach volatility – i.e. fluctuations in the prices of your investments.
A lower risk tolerance means less emotional and financial ability to withstand these movements, especially if the market drops. There is nothing wrong with having a lower risk tolerance. What matters is that you are honest with yourself about it and build an appropriate strategy around it.
Uncertainty is inherently a part of investing. It cannot be avoided – only managed. Even a “safe” investment will carry some risk. For instance, cash might seem risk-free because you cannot see its price moving on a stock exchange. However, its value is susceptible to inflation risk.
A financial adviser can help you ask the right questions to understand your risk tolerance, helping you strike the right balance between protecting your money and helping it grow.
Invitation
We hope this jargon-busting guide has inspired and emboldened you in your investing journey. To ensure you’re taking the right steps to safeguard your financial future, please get in touch. We’d love to discuss your goals with you!
Please note:
Your capital is at risk. Investments can go down as well as up. Past performance is not indicative of future results. Tax treatment depends on individual circumstances and may change. This content is for information only and not investment advice. Any decision to invest is the reader’s own. Diversification is key to managing risk. Market volatility affects investment values. Inflation erodes savings. Liquidity risks may prevent quick access to funds.
