California Teachers Association Investment Glossary

This is the period during which contributions are made to an annuity.

A specialist who calculates risk, such as for insurance premiums and annuity rates.

In mortgages or other liabilities, this is the gradual elimination of the debt over time.

To begin receiving payments from an annuity, often over a lifetime or a specified period.

This is a contract between an insurance company and an individual that generally guarantees a lifetime income option, usually at retirement, in return for either a lump sum or periodic payments. See fixed annuity and variable annuity.

This is the strategy of dividing your money among the three major asset classes. This helps manage risk while you pursue growth, because the three classes tend to react differently to economic conditions.

These are the main categories of investments at the most basic level, generally stocks (also called equities), bonds and cash or cash equivalents. When participating in a 403(b) or 457 plan, you will generally invest in mutual funds (should you choose) that incorporate the risk/return profiles of one or more of these asset classes.

This is a sales fee that is charged when you redeem shares of a mutual fund or sell a variable annuity contract.

A long-term loan, like a mortgage, that has a large payment, called the balloon, at the end of the loan term.

This is a long period of market decline with widespread pessimism. Opposite of bull market.

The beneficiary or beneficiaries you name when you enroll in your 403(b) or 457 plan, purchase a life insurance policy or establish a will are the person or persons who will receive the associated assets, if any, upon your death.

Bonds are loans to a government, state, municipality, agency, institution or corporation. Typically, in return for the loan, the bond issuers agree to pay interest to the bondholder and pay back the principal (the amount paid for the bond) at the end of the bond’s term (maturity). With zero-coupon bonds, however, no interest is paid. Instead, the bond is purchased at a discount from its face value to be redeemed at full value at maturity.

This is a long period of rising prices. Opposite of bear market.

This is the amount of profit on an investment resulting when the sale price is greater than the original purchase price.

This is the amount that results when the sale price is lower than the original cost; opposite of capital gain.

These are liquid investments (easily sold and converted to cash) that have little or no change in underlying price. Examples are money market or stable value funds.

With compounding, earnings on the account (which can be any combination of interest, dividends and capital gains) are added to the principal, increasing the base upon which subsequent returns are earned.

The consumer price index (CPI), also called the cost-of-living index, is a measure of inflation (or rarely, deflation); the change in prices of a basket of goods and services. It is calculated monthly.

This is the amount of money, or percentage of your pay, that you put toward your 403(b) or 457 plan through a salary reduction agreement. The contribution is also sometimes called a deferral.

This is a tax-advantaged college savings account.

A default occurs when the individual or entity fails to make scheduled payments on a debt.

The traditional pension plan, where the employer and often the employee make contributions, but the benefit is guaranteed and based on a formula that is consistently applied to all participants in the plan.

This is a plan, like your 403(b) or 457 plan, in which you (the participant) make contributions. The account balance is dependent on the amount contributed and the performance of the investments chosen by the participant.

A distribution occurs when you start taking money from your 403(b) or 457, either as a lump sum or in a series of periodic payments. These distributions are generally taxed at ordinary income tax rates. Early nonqualified distributions from your 403(b) plan may be subject to a 10% tax penalty (does not apply to 457 plans).

This investment strategy is a step beyond asset allocation. It means to spread your investments among not only the three major asset classes, but also among different investments within those classes. In this way, you avoid letting any single investment have an outsized impact on your portfolio, so you moderate risk. Note, however, that diversification does not guarantee a profit or protect against loss in a declining market.

A dividend is a share of the company’s earnings that is paid out to stockholders. When you receive dividends within your 403(b) or 457 plan account, they are reinvested automatically for you.

Also called Systematic Investing. With this investment strategy, you invest the same amount of money on a regular basis, regardless of what the market is doing. In this way, you help remove emotional decisions from your investment strategy and decrease the impact that timing of the purchase has on your investments, which could be positive or negative. By contributing regularly to your 403(b) or 457 plan, you are taking advantage of dollar-cost averaging. Dollar-cost averaging cannot guarantee a profit or protect against loss in a declining market.

These mutual funds may invest within a single country or a larger region, but typically only invest in countries and/or regions considered to be emerging economically. For example, India may be considered to be an emerging market.

A mutual fund that invests in equities (stocks of companies).

This type of annuity's return is based on changes in an equity index such as the Standard & Poor's 500 Index.

A person or entity named in a will to settle the estate.

The operating costs of a mutual fund expressed as a percentage of the fund's net assets.

An individual or entity that is legally and ethically bound to work in your best interests at all times.

The Financial Industry Regulatory Authority regulates securities firms doing business in the United States.

This is an annuity that guarantees a minimum return for a specific period, as specified in the contract with the insurance company.

These mutual funds invest exclusively in companies based in foreign countries. They may be invested in companies within a certain region of the world (an “Asia fund”) or invested in any non-U.S.-based companies.

This is a sales fee that is charged when you purchase a mutual fund or annuity.

These mutual funds invest in companies around the entire world, including those which are based in the United States.

This is a law that affects spouses, widows and widowers who receive a pension from a federal, state or local government based on work where they did not pay Social Security taxes. Individuals who receive such a pension may have their Social Security spouse's, widow's or widower's benefits reduced.

Index funds are mutual funds that seek to duplicate the performance of a particular benchmark index. The fund may hold all of the same securities that are in the index, in the same proportion, or it may include a statistical sampling of the securities in the index. These funds are passively managed – that is, securities are bought and sold only in response to changes in the index.

Also called an IRA. This is a personal retirement account that you can get through a bank, credit union or brokerage account. You may open an IRA even if you have a defined benefit and/or defined contribution plan at work. With a traditional IRA, the funds grow tax-deferred and contributions may be tax-deductible under certain conditions. With a Roth IRA, contributions are never tax-deductible, but funds may be withdrawn tax-free if certain requirements are met.

Inflation is the increase in the cost of living over time, as measured by the U.S. Department of Labor's Consumer Price Index.

Individual Retirement Account. This is a personal retirement account that you can get through a bank, credit union or brokerage account. You may open an IRA even if you have a defined benefit and/or defined contribution plan at work. With a traditional IRA, the funds grow tax-deferred and contributions may be tax-deductible under certain conditions. With a Roth IRA, contributions are never tax-deductible, but funds may be withdrawn tax-free if certain requirements are met.

This is a trust that cannot be changed or canceled once it is set up without the beneficiary's consent.

This is the company that manages and administers a mutual fund.

Market timing is an attempt to predict the future direction of the market and make investment decisions based on those predictions.

This charge compensates the insurance company for the insurance risk it assumes under annuity contracts that provide a death benefit.

These are bonds issued by state, city or local governments.

A mutual fund pools money from many investors to purchase stocks, bonds, cash equivalents or some combination that is consistent with the fund’s investment objective.

Net asset value (NAV) is the value of a single share of a mutual fund, calculated at the end of each business day.

If the mutual fund shares are sold without a commission or sales charge, it is a no-load fund.

This is a public official who is responsible for witnessing that legal documents have been properly completed and signed. Notaries do not complete legal documents or give legal advice.

Your 403(b) or 457 plan portfolio is the collection of investments you have in your account. You may also have an investment portfolio outside your employer-sponsored retirement plan.

This is the amount of money you invest, before earning any interest or dividends.

The prospectus is the legal document that describes a mutual fund’s objectives, types of investments and major holdings, risks and management style. It is important to read the prospectus before investing to see if the fund is appropriate for your goals, timeline and risk tolerance.

Also known as A Qualified Domestic Relations Order. A QDRO is a document that ensures that the plan sponsor recognizes a nonemployee spouse’s right to a portion of the plan after divorce.

Also known as a QDRO. A Qualified Domestic Relations Order is a document that ensures that the plan sponsor recognizes a nonemployee spouse’s right to a portion of the plan after divorce.

Re-allocation occurs when you change your contribution strategy based on a change in your goals, timeline or risk tolerance. For example, you may decide that, as you near retirement, you want to re-allocate your contributions from 70% in a stock fund and 30% in a bond fund to 50% in a stock fund and 50% in a bond fund.

This is the act of returning your investments to your original asset allocation if it has changed due to market performance.

Also known as RMDs. Required Minimum Distributions are the amounts that the Internal Revenue Service requires individuals to withdraw from their tax-deferred retirement plans, generally starting at age 70 1/2.

Generally, a tax-free transfer from one qualified retirement plan to another.

A Roth individual retirement account (Roth IRA), unlike a traditional IRA, does not allow tax-deductible contributions. However, if certain requirements are met, distributions in retirement may be tax-free.

The Securities and Exchange Commission is a government agency that regulates securities markets and protects investors.

The spread is the difference between two prices. For example, in a fixed annuity, the spread is the difference between what the issuer earns on the money it invests and what it pays out to the annuity owner.

These types of investments are considered lower risk than stocks, and are generally high-quality, low-maturity bond funds that offer a steady investment value through the use of an insurance contract. Stable value funds typically stress preservation of capital and provide a steady stream of income.

Shares in the ownership of a company are called stocks or equities. You can buy shares of stock in an individual company or through investment in a stock mutual fund.

Also called Dollar-cost Averaging. With this investment strategy, you invest the same amount of money on a regular basis, regardless of what the market is doing. In this way, you help remove emotional decisions from your investment strategy and decrease the impact that timing of the purchase has on your investments, which

could be positive or negative. By contributing regularly to your 403(b) or 457 plan, you are taking advantage of dollar-cost averaging. Dollar-cost averaging cannot guarantee a profit or protect against loss in a declining market.

The major benefit of 403(b) and 457 plans, it allows funds within the plan to grow without being reduced each year by taxes. Taxes are paid at ordinary income tax rates when distributions begin at retirement.

This is an entity hired by the district to handle salary remittances to 403(b) vendors and other compliance and recordkeeping duties as assigned.

This is an annuity (contract with an insurance company) in which the performance of investments in a subaccount determines the return.

This is the fluctuation in prices of an investment over short periods of time.

This provision affects individuals who have earned a pension in a job where they did not pay Social Security taxes, but who also worked in other jobs where they did pay Social Security taxes and worked long enough to qualify for a Social Security benefit. Social Security benefits may be reduced in this situation.

This is the length of time an investment is held from the time of purchase to the time of the sale. It is important because, in taxable accounts, the holding period determines whether short-term or long-term capital gains taxes will be due if the investment is sold at a profit.

This is a federal education tax credit.

A joint life annuity is an annuity issued on two individuals. Generally, payments continue until both individuals have died.

A jumbo mortgage is a loan that exceeds the limit to qualify for a government-backed loan; it generally has higher interest rates than a conventional loan.

Laddering is a strategy often used with bonds and certificates of deposit (CDs). It involves purchasing multiple investments in a manner that results in maturity dates at regular intervals.

Liquidity is the ability to convert an asset into cash quickly and easily without losing money in the process.

In retirement savings, this is the risk that an individual will have a longer life expectancy than anticipated and run out of savings before he or she dies.

This is the rate of return on an investment, usually expressed as a percentage.

This is a type of bond that is sold at a discount (less than its face value) and is redeemed at its face value upon maturity.