Glossary

Agency Account

An account in which someone acts for another but without acquiring title to assets. The agent acts for a principal and agrees to carry out certain duties with respect to the principal’s property.

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Agent

Individual or institution authorized by someone to act for him or her, usually for a fee, within prescribed areas of activity.

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Annuities

Annuity form contracts sold by life insurance companies that guarantee a fixed or variable disbursement to the annuitant at some future time, usually in retirement.

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Arithmetic Mean

The arithmetic mean of a series is the simple average of the elements in the series. It is expressed in the same terms as the underlying data frequency.

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Asset Class

A grouping of securities with similar characteristics and properties. As a group, these securities will tend to react in a specific way to economic factors (e.g., stocks, bonds, and real estate are all asset classes).

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Assignment

Transfer of property or certain property rights from one person to another.

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Beneficiary

Person or entity to receive benefits from a Will, insurance policy, trust agreement or employee benefit plan. An INCOME BENEFICIARY is a beneficiary of a trust who receives only the income generated by the trust fund, not its principal. A PRIMARY BENEFICIARY is an individual or group entitled to receive immediate benefits from the property of a trust.

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Blue Chip Stocks

High-quality stocks; usually from major companies with histories of good earnings and dividend payments, promising growth outlooks and well-regarded management and financial structures.

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Capital Appreciation-Bonds

A bond's capital appreciation is defined as the total return minus the income return; that is, the return in excess of yield. This definition omits the capital appreciation or depreciation that comes from the movement of a bond's price toward par (in the absence of interest rate change) as it matures. Capital appreciation, as defined here, captures changes in bond prices caused by changes in the interest rate.

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Capital Gain

A capital gain occurs when the selling price of an asset exceeds the purchase price.

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Capital Gain/Loss

Difference between the amount paid for a capital asset and the amount received when it is sold. A CAPITAL GAIN occurs when more is received than was spent. A CAPITAL LOSS occurs when less is received than was spent.

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Capital Gains Tax Rate

The capital gains tax rate is the tax on profits received from the sale of an asset. Portfolio Strategist does not recognize capital losses.

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Common Stock

Ordinary ownership shares in a corporation. Common stock does not have priority in dividend payment or other payments; preferred stock does.

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Community Property

The legal concept that husband and wife each own half of the property accumulated during their marriage, except for what each receives by gift or inheritance.

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Corporate Fiduciary

Institution acting on a person’s behalf, for example, by being executor, administrator, trustee or guardian.

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Corporate Trustee

A trust institution serving as a trustee.

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Correlation Coefficient

The correlation coefficient measures the sensitivity of returns on one asset class or portfolio to the returns of another. Highly positive correlations (near 1.0) indicate a direct relationship, whereas negative correlations (near -1.0) indicate an inverse relationship between asset classes. Correlation coefficients near zero mean that an asset class has little sensitivity to the movement of another.

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Cost Basis

Original price of an asset used in determining capital gains. It most likely is the purchase price.

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Current Annual Pre-Tax Income

Current Annual Pre-Tax Income, or gross earnings, is an individual's salary prior to deductions, such as taxes, Social Security and employee benefit contributions.

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Current Cost

The current cost of college is today's first year cost of (tuition + expenses) for the institution a child plans to attend.

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Custodian

Individual or institution whose duty is to hold, protect and account for property in its care.

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Custody Account

Account relationship in which a trust institution has the duty to provide for the physical protection of, and record keeping for, a customer’s assets and to act under his or her direction in certain matters but not to manage the assets on its own.

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Defined Contribution Plan

A defined contribution plan is a tax deferred retirement plan, such as a 401(k) or profit sharing plan, that provides a separate retirement account for each person covered by the plan. Future benefits are based solely on amounts contributed to the plan and the investment relating to the growth of those contributions.

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Directed Account

Type of account where the trust institution buys and sells securities only at the direction of the customer or of a third party designated by the customer.

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Dividend

Cash, securities or other property that each stakeholder of a corporation receives when declared in proportion to the number of shares of stock he or she owns.

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Earnings Growth Rate

The earnings growth rate is the percentage growth in salary expected each year. This rate takes into consideration the inflation rate for the projected investment horizon and the incremental premium you enter in the Expected Real Wage Premium field. The expected earnings growth rate equals the geometric sum of the Expected Real Wage Premium and the Inflation Rate selected in the Plan Horizon sub-tab.

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Estate

All the property and rights in property, of every kind, possessed by a person and capable of being transferred to someone else.

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Estate Taxes

Death taxes calculated from the total amount of property owned at death, without regard to who will receive that property, payable by the estate before property is transferred to heirs. Compare inheritance taxes, in which tax rates often vary with the identity of the heir.

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Executor

Person or trust institution named in a Will to administer (settle) an estate. An executor (known as a personal representative in some states) has the responsibility of seeing to it that the Will is probated, that all the necessary administrative chores are carried out, and that the estate is distributed to beneficiaries as directed in the Will.

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Expected Real Wage Premium

The real wage premium is the incremental rate an individual's wages grow in excess (or at a deficit) relative to inflation.

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Face Amount

Principal amount shown as payable on a document such as a bond or insurance policy.

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Fair Market Value

Price at which, providing there are no extraneous factors, both a seller would be willing to sell and a buyer would be willing to buy.

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Fiduciary

An individual or institution acting on behalf of another and charged with meeting high standards of trust and confidence. For example, a bank that acts as trustee stands in a fiduciary relationship and is held to a high standard in its dealings with trust assets.

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Fixed-Income Securities

Securities, such as bonds or preferred stock, that pay income at fixed rates.

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General Power of Appointment

A power that entitles the holder to transfer the property, subject to the power, to the holder, the holder’s estate, the holder’s creditors, or the creditors of the holder’s estate. Generally, the holder may transfer the property to whomever the holder wishes. All property subject to this power is included as an asset in the gross estate of the holder.

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Government Securities

Investment arrangements offered by the U.S. government and its agencies in the form of certificates of debt paying a type of interest. Government securities include Treasury bills, Treasury bonds, Treasury notes, and U.S. Savings Bonds.

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Grantor

Person who transfers property or property rights to another; for example, by setting up a trust.

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Guardian of Estate

Individual or trust institution appointed by a court to care for the person and/or property of an incapacitated individual considered unable to do so for himself or herself.

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Income Return

Income return is the portion of total return that results from a periodic cash flow such as dividends.

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Income Return-Bonds

Income return, in this case, is calculated as the change in flat price from one period to the next, holding the yield constant over the period. The exact number of days from the beginning of one period to the end of the next is used.

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Individual Retirement Account (IRA)

An IRA is a personal, tax deferred, retirement account that an individual can set up. Income level and eligibility for an employee pension plan determine whether an employee's contribution is tax-deductible.

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Inheritance Tax

State or local tax on the right to receive property by inheriting it; not the same as an estate tax, though most states require the estate itself, rather than the receipt of the inheritance, to pay the inheritance tax.

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Investment Management Account

An investment account where the trust institution is authorized to make purchases and sales on a customer’s behalf and provides reports of account transactions on a regular basis.

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Investment Objectives

Stated needs or goals of an investor, such as long-term growth, immediate income or preservation of purchasing power.

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Joint Tenancy

The holding of property by two or more persons in such a manner that it is considered wholly owned by each of the persons during his or her lifetime and upon the death of one person passes to the survivor(s).

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Living Trust

Type of trust that a person sets up to become operative (for his or her benefit or that of others) during his or her lifetime.

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Marginal Tax Rate

The Marginal Tax Rate is the amount of tax levied on an additional dollar of income. Due to the U.S. progressive income tax system, the Marginal Tax Rate increases as income rises.

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Marital Deduction

Federal estate and gift tax deduction allowed for transfers of property from husband to wife or wife to husband.

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Mean-Variance Optimization

This financial theory uses expected return, standard deviation and correlation (based on historical returns) to create an Efficient Frontier upon which every point is considered optimal. Therefore, every point on the Efficient Frontier is considered to have the maximum return for a given level of risk, or standard deviation.

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Money Market Fund

Type of mutual fund in which investments are made only in short-term, money market instruments, such as federal securities, CDs and commercial paper.

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Optimal Portfolio

An optimal portfolio is a mean-variance efficient mix located along the Efficient Frontier.

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Personal Representative

The institution or individual responsible for settling an estate; an executor.

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Portfolio Manager

Person who handles the assets of a managed account, fitting stated investment policy to the needs of the account by deciding what and when to buy and sell.

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Principal

Value of property; including property in a trust, other than the income derived from it.

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Probate

Legal process by which a Will, after the death of its maker, is proved or established as being valid in which an executor or administrator is appointed to oversee carrying out the terms of the Will.

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Rate of Return

The rate of return is a measure of the reward an investor earns for holding an asset class for a period of time. Returns can be measured as total return or in terms of income return or capital appreciation return components. The method for computing a return varies with the nature of the payment and the time period of measure.

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Retirement Income Needs

The amount of income a retired individual needs to receive per year. Typically, this amount is pegged at 70% to 80% of pre-retirement income for individuals intending to maintain their pre-retirement standard of living.

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Retirement Period

The amount of time a person expects to live in retirement. Generally, it is expected that an individual who retires at age 65 will live 20 or more years in retirement.

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Return

Returns and indexes are used to measure the rewards investors earn for holding an asset class. Returns represent changes in levels of wealth. (See also Rate of Return.)

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Risk (Standard Deviation)

Risk (standard deviation) measures the dispersion of returns of an asset, or the extent to which possible returns can vary from the arithmetic mean. It is a measure of the volatility or risk of an asset.

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Roth IRA

A Roth IRA is a personal retirement account that an individual can set up. Income level determines whether a person can participate.

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Short–Term Investments

Temporary investments, such as Treasury bills and other money market instruments, that can be readily converted to cash.

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Tenancy in Common

Holding of property by two or more persons in such a way that each keeps control of his or her individual shares of the property and may sell or will his or her share independently of the other(s).

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Testamentary Trust

Type of trust established under the terms of a Will to begin to function at a person’s death.

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Total Return

Total return is a measure of performance of an asset class over a designated time period. It is comprised of income return, reinvestment of income return and capital appreciation return components.

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Treasury Bill (T-Bill)

Security issued by the U.S. Treasury Department at a discount and redeemed at face value, thus paying a kind of interest; matures in a year or less.

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Treasury Bond (T-Bond)

Security issued by the U.S. Treasury Department that pays interest every six months and matures in more than seven years.

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Trustee

Institution or person designated to oversee the handling and distribution of a trust fund.

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Trust Instrument

Trust agreement or Will in which the terms of a trust are set forth.

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Trustor

Person who creates a trust.

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Tuition Premium

The tuition premium is an incremental rate that reflects the anticipated annual increase of college expenses in excess of inflation.

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Turnover Rate

For tax purposes, capital gains are "realized" when an asset is sold for an amount above the purchase price. In Portfolio Strategist, the Turnover rate is the percentage of the capital gains "realized" each year. For example, a realization percentage of 20% indicates that one-fifth of the portfolio is turned over in a year resulting in the realization of capital gains. Therefore, there is a 100% turnover every five years.

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Yield

Income (dividends or interest) from a security expressed as a percentage of the security’s value. The yield on a bond series is defined as the internal rate of return that equates the bond's price (the average of bid and ask, without adding the accrued coupon) with a stream of cash flows (coupons and principal) promised to the bondholder. The yield on an equity is the percentage rate of return paid on a common or preferred stock in dividends.

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