Wise Information for Higher Ed Employees



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Investment Tips & Tools: Key Investment Terms


An ownership share in a company that allows you to participate in any gains or losses realized by the company. You own a piece (proportional to the actual number of shares you own) of the company in which you hold stock. Stocks are sometimes referred to as equities. While 403(b) and 457(b) investors cannot directly invest in individual stocks, they are permitted to invest in mutual funds that are composed of stocks, and they may invest in variable annuities that contain mutual funds which include stocks.


A form of debt issued by a governmental entity or a company. When you invest in a bond, you are lending money to the entity that issues the bond. In return you are paid interest. Bonds can be distinguished by credit quality (the ability of issuing entity to pay back its bondholders) and maturity (when due). While 403(b) and 457(b) investors cannot directly invest in individual bonds, they may invest in a mutual fund that purchases bonds, and they may invest in a variable annuity that contains a mutual fund that purchases bonds.

Fixed Investment

A relatively safe, static investment that pays a steady, fixed rate of return. Examples of fixed investments include a fixed annuity, a bond or bond fund, a savings account, and a money-market account.

Fixed Annuity

Fixed annuities operate much like certificates of deposit but are not insured by the Federal Deposit Insurance Corporation (FDIC). Generally, investors are given two interest rates: the current rate and the guaranteed rate. The current rate is the return that the insurance company promises to pay for a set period of time, typically between one and five years. The guaranteed rate, usually lower, is the minimum rate that investors will receive after the current rate expires, regardless of market conditions.

Variable Annuity

A variable annuity offers a range of investment options — typically mutual funds that invest in stocks, bonds, short-term money-market instruments, or some combination of the three. These investments options are referred to as the subaccount. The value of the investment will vary depending on the performance of the investments in the subaccount. There is usually a death benefit that will pay a beneficiary the greater of the account value or a guaranteed minimum amount, such as total purchase payments. Variable annuities are securities regulated by the Securities and Exchange Commission (SEC).

Mutual Fund

A mutual fund is an investment that pools money from many participants and invests in stocks, bonds, short-term money-market instruments, or some combination of the three. The combined holdings of stocks, bonds, or other assets that the fund owns are known as its portfolio. Each investor in the fund owns shares, which represent a part of these holdings. There are two kinds of mutual funds: loaded mutual funds and no-load mutual funds. A load is a commission the investor must pay in order to purchase that fund. All mutual funds have operating costs. Mutual funds are securities regulated by the Securities and Exchange Commission (SEC), but are not guaranteed or insured by the Federal Deposit Insurance Corporation (FDIC) or any other government agency.

S&P 500

The Standard and Poor's (S&P) 500 consists of five hundred companies chosen from a range of industries. The five hundred companies represent the most widely held U.S.-based common stocks, chosen by the S&P Index Committee for market size, liquidity, and industry sector representation. Because the companies are highly diverse, spanning every relevant portion of the U.S. economy, the index is useful in giving investors an idea of the overall direction of the stock market.
The S&P 500 is usually considered the benchmark for U.S. equity performance. It represents 70 percent of all U.S. publicly traded companies.

Risk Tolerance

An investor’s ability to weather declines in the value of his or her portfolio. Those with low risk tolerance may be better suited to a conservative investing stance relying for the most part on fixed investments. Conversely, those with high risk tolerance may be better suited for more aggressive investments.

Asset Allocation

The process of distributing investments across various asset classes (types of investments) in an attempt to moderate the inevitable ups and downs of the market. While fixed investments (fixed annuities, bond funds, money market funds, and the like) remain steady, mutual funds tied to the stock market (which are known as equities) fluctuate, especially over short periods of time (less than five years).
Market fluctuation tends to smooth out over time. From January 1979 to December 2007, for example, the average annual compounded rate of return for the S&P 500 was better than 13.8 percent (minus fees and taxes). However, over this same period the S&P 500 fluctuated wildly. One year the S&P 500 dropped by 39 percent; another year it soared by 64 percent. For this reason, it is important that investors have a mix of investments (fixed and equities) that are appropriate to their risk tolerance. A very general rule of thumb is that investors have an allocation of fixed investments that match their age. For example, a 40-year-old might have 40 percent of their portfolio allocated toward fixed investments, and 60 percent allocated toward equities. Asset allocation is also referred to as diversification. In plain English it simply means don't put all of your eggs in one basket.
Assembling a properly allocated portfolio can be a challenge, especially for those who are new to investing. Vendor agents and individual financial professionals can help investors properly allocate their portfolios. Cost for this service may be built into the product, and will vary by agent and financial professional.
Another approach to asset allocation is to purchase a static, pre-allocated mutual fund. This type of mutual fund is available in a variety of allocations. For example, one fund may be split 60 percent equities, and 40 percent fixed investments, while another fund may be split 40 percent equities, and 60 percent fixed investments. Numerous mixes exist. Rules of operation and costs vary by vendor.

Life Cycle (a.k.a. Target Date or Age-Based) Funds

A relatively new — and considered by many to be a simple — approach to ensuring a suitable allocation over time is to invest in a single Target Date Retirement Fund. This strategy, which is also known as the Life Cycle or Age-Based approach, requires that an investor choose an estimated retirement date; for example the year 2023. The investor then picks a Target Date Retirement Fund that most closely corresponds to that date (such as a 2025 fund). The longer the time until retirement, the more weighted the mutual fund is toward equities (stocks). As the target retirement date approaches, the fund automatically becomes more weighted toward fixed investments. The investor does not have to make any changes to the fund. All allocation changes are made by the fund operators. When the target date is reached, the fund remains open for about five years; during that period the fund gradually reduces its equity (stock) exposure until its investment mix mirrors that of a typical static retirement fund (generally 80 percent fixed investments and 20 percent equities). Rules of operation and costs vary by vendor.


A beneficiary is the person or persons you designate to receive the proceeds of an investment upon your death. When you start a 403(b) or a 457(b) account, you are given an opportunity to name a beneficiary. Your vendor should be able to provide details on how to name a beneficiary and how to change a beneficiary.

Surrender Charges

A charge levied against an investor for the early withdrawal of funds from an insurance or annuity contract, or for the cancellation of the agreement. Surrender fees vary among insurance companies and among annuity and insurance contracts, but a typical annuity surrender fee could be set as a 10% (of the funds contributed to the contract) charge levied for withdrawal in the first year. For each successive year of the contract, the surrender fee could drop by 1%, for example, effectively giving the annuitant the option of no-penalty withdrawal after 10 years in the contract.