Every word, defined.

A multi-year return restated as the equivalent yearly rate. Lets you compare investments fairly.

A return over several years restated as the compound annual rate that would produce the same result. If an investment grew 50% over 5 years, the annualized return is ≈8.4%/year (not 10%). Almost every chart you see is annualized, without it, comparing different time horizons is meaningless. Sometimes called CAGR (Compound Annual Growth Rate).

How you split your money across asset types (stocks, bonds, cash). The biggest decision.

The proportions of your portfolio held in different asset classes, usually stocks, bonds, and cash. Decades of research show that asset allocation explains most of the variation in long-term returns, far more than picking specific stocks.

A loan you make to a government or company. They pay you interest, then return your money.

A debt instrument: you lend money to an issuer (government, company) for a fixed period. They contractually pay you interest at agreed dates and return the principal when the bond matures.

The intermediary that holds your investments and executes your trades.

A regulated company that holds your investment account and executes orders to buy or sell on your behalf. Modern online brokers usually charge nothing per trade. Pick one that's well regulated, has low fees on the products you actually use, and has been around for at least 5-10 years.

Long stretches of rising prices (bull) or falling prices (bear). Both end, eventually.

A bull market is a sustained period of rising prices, typically defined as +20% off recent lows. A bear market is the opposite: a sustained -20% drawdown. The names come from how each animal attacks, bulls thrust upward with horns, bears swipe down with paws.

The strategy of buying investments and holding them for years or decades, ignoring noise.

A strategy of buying quality investments (usually broad-market index funds) and holding them for very long periods, ignoring short-term price movements. Backed by decades of evidence: most active traders underperform a boring buy-and-hold investor over 10+ years, after fees and taxes.

The profit you make when you sell an investment for more than you paid for it.

The increase in value of an investment, realized only when you sell. Unrealized gains exist on paper while you still hold the asset; realized gains happen the moment you sell, and usually trigger taxes. Capital gains are the main way most stock investors make money over time.

The tax owed when you sell an investment at a profit.

The tax charged on the profit (capital gain) when you sell an investment for more than you paid for it. Rates vary by country and by holding period, many countries tax long-term gains (held over a year) at lower rates than short-term ones, to incentivize patient investing.

A fee charged by a broker each time you buy or sell. Mostly $0 with modern brokers.

A per-trade fee charged by a broker for executing your buy or sell order. Once standard at $5-$15 per trade, now often zero with modern online brokers. Watch for commissions on specific products (mutual funds, foreign stocks) where they can still bite.

A raw material like gold, oil, wheat. Bought and sold on global markets.

A basic raw material that's essentially the same regardless of who produces it, gold, oil, wheat, copper, natural gas. Traded on global markets in standard contracts. Doesn't produce cashflow (gold doesn't pay dividends), so commodity returns come entirely from price changes. Often used as a hedge against inflation.

Interest paid not just on what you put in, but on the interest you have already earned.

The mechanism by which an investment earns interest on both the original principal and on the interest accumulated in previous periods. Over decades it turns small contributions into surprisingly large balances.

A bond issued by a company instead of a government. Higher yield, higher risk.

Debt issued by a corporation to raise money. Pays a higher interest rate than government bonds because corporations can, and sometimes do, go bankrupt. Rated by agencies like S&P and Moody's; "investment grade" is safer, "high-yield" or "junk" is riskier with higher coupons.

A market drop of 10-20% from recent highs. Less severe than a bear market.

A drop of 10% to 20% in an asset or market from its recent peak. Considered normal market behavior, happening on average every 1-2 years for major indexes. Often resolves within months. The cousin of crashes (faster, deeper) and bear markets (slower, longer).

The fixed annual interest a bond pays its holder, expressed as a percentage of face value.

The contractual interest payment a bond makes to its holder, set when the bond is issued. A 4% coupon on a $1,000 bond pays $40/year regardless of what the bond trades for in the market afterwards. The price moves; the coupon does not.

A sudden, sharp drop in market prices. Usually 20%+ in days or weeks.

A rapid, severe decline in asset prices, typically 20% or more, that happens over days or weeks (vs months or years for a bear market). Often triggered by a specific shock, a financial crisis, a pandemic, a war. Painful in the moment, but historically followed by recoveries within a few years.

A digital asset traded on a blockchain. Highly volatile and largely unregulated.

A digital asset that exists on a decentralized network (a blockchain). Bitcoin and Ethereum are the largest. Crypto is highly volatile (often 60-100% annual swings), produces no intrinsic cashflow (no dividends, no interest), and remains largely unregulated. A speculative asset, not a savings vehicle.

Neutralising the exchange-rate effect on a foreign investment, usually via forward contracts inside the fund.

A mechanism (usually FX forwards rolled monthly inside the fund) that strips out the currency component of a foreign investment's return. You get the asset's performance in its local currency, regardless of what your own currency does. Hedging has a cost: a slightly higher TER plus a small "carry" tied to the interest-rate differential between the two currencies.

The risk that exchange-rate moves change the value of a foreign investment in your home currency.

When you buy a foreign asset, your return has two parts: how the asset moved in its own currency, and how that currency moved against yours. A great year for the S&P 500 in dollars can become a bad year in euros if the dollar weakens enough. Over decades and across diversified holdings, the effect tends to wash out; over short periods, it can dominate.

Prices going down across the economy. Sounds nice; usually a sign something is broken.

A general decline in prices across the economy, the opposite of inflation. While cheaper things sound great, sustained deflation usually signals weak demand, deferred spending, and economic stagnation. Often happens during deep recessions and is hard to reverse.

Spreading money across many different things so no single one can sink you.

The practice of holding many different investments so the failure of any one has limited effect. The closest thing to a "free lunch" in finance, it lowers volatility without much giving up expected return.

A cash payment a company sends to its shareholders, usually each quarter.

A portion of a company's profits paid to shareholders, typically every quarter. Not all companies pay them, many growth companies reinvest profits instead. When reinvested automatically, dividends quietly accelerate compounding.

Investing a fixed amount on a regular schedule, regardless of price.

Often shortened to DCA. The practice of investing a fixed amount on a regular schedule (e.g. every paycheck) regardless of market conditions. Smooths out the price you pay over time and removes the temptation to time the market.

How far an investment falls from its peak before recovering. The pain measure.

The percentage decline of an asset from its most recent peak to its current level. More useful than volatility for understanding what an investment actually feels like to hold during bad years.

How sensitive a bond's price is to interest-rate moves. Longer duration means bigger price swings.

A measure of how much a bond's price changes when interest rates change. As a rule of thumb, a bond with a duration of 10 will lose about 10% of its price if rates rise by 1 percentage point. Longer-maturity bonds have higher durations, which is why they swing the most when central banks move rates.

Total tax paid divided by total gross income, the "real" percentage you pay.

The actual share of your gross income that ends up as tax once all brackets, deductions, and allowances are applied. Always lower than your marginal rate in a progressive system. The effective rate is the honest answer to "how much of my salary do I lose to tax?".

3-6 months of living expenses kept in cash, separate from any investment.

A reserve of cash, typically 3 to 6 months of essential expenses, held in a savings account for unexpected costs (job loss, medical, urgent repair). The first thing to build before investing seriously. Without it, you risk being forced to sell investments at the worst possible moment.

A basket of many investments, often hundreds, bought in a single transaction.

Exchange-traded fund. A fund that holds many stocks (or bonds) and trades on an exchange like a single stock. Lets you buy a slice of an entire market with one purchase, and is the simplest way to diversify.

The annual fee a fund charges, expressed as a percentage of your investment.

The yearly cost of owning a fund, expressed as a percentage of assets. An expense ratio of 0.10% means the fund takes $10/year out of every $10,000 invested, automatically deducted from the fund's value, so you never see the bill. The single most important number when comparing funds.

A charge taken from your investment by a fund, broker, or advisor, every year, forever.

Any charge taken from your investment, expressed annually as a percentage. Often quoted in basis points (100 bps = 1%). Compounded over decades, even small fees can quietly destroy a huge share of returns.

US payroll tax that funds Social Security and Medicare. 7.65% from employees in total.

Federal Insurance Contributions Act tax. Splits into 6.2% Social Security (capped at a yearly wage base, $168,600 in 2024) and 1.45% Medicare (no cap), withheld from every paycheck. Employers match the same amount.

A movement around saving aggressively until your invested portfolio can fund your life forever.

"Financial Independence, Retire Early." A loose movement built on aggressive savings rates (often 50%+ of income) and index investing, with the goal of accumulating enough, usually 25× annual spending, that work becomes optional. The "RE" gets most of the attention but the "FI" is the real win: choice over labor.

Fear of missing out. Drives investors to buy at the worst possible moment.

Fear of missing out. The emotional pull to buy something that's already gone up a lot, because everyone else seems to be getting rich from it. Cousin of panic selling, same emotional system, opposite direction. Almost always drives investors to buy at peaks, just before the regret begins.

A savings account that pays an above-average interest rate. Worth shopping for.

Often called HYSA. A regular savings account that simply pays a much better interest rate than the big banks, typically offered by online-only banks that have lower overhead. Same insurance, same liquidity, often 10-50× the rate of a traditional savings account.

A representative basket of a market, like the S&P 500 or the IBEX 35.

A standardized list of investments designed to represent a slice of the market, a country, a sector, a size band. Indices are not something you can buy directly; you buy a fund that tracks one.

A fund that simply mirrors an index, instead of trying to beat it.

A fund (often an ETF) whose only job is to replicate the performance of an index, holding roughly the same things in the same proportions. Because there's no manager picking stocks, fees are very low, and historically they have beaten most actively managed funds.

The rate at which the general price of things rises. Same money, less purchasing power.

The rate at which prices of goods and services rise over time. The number in your account stays the same, but it buys less. Even a "safe" savings account loses real value when inflation outpaces the interest rate.

The percentage something pays, or costs, per year.

The annual percentage paid by a saver or charged by a lender, expressed as a percent of the principal. The same number means very different things depending on whether it is paid to you (savings) or by you (debt).

Putting money to work in productive assets so it grows over time. The opposite job from saving.

Investing is buying assets, stocks, bonds, ETFs, real estate, that produce returns over time, either through growth in value or income (dividends, interest, rent). It accepts short-term volatility in exchange for long-term growth that beats inflation. The longer the time horizon, the more sense it makes; the shorter the horizon, the riskier it gets.

The first time a private company sells shares to the public.

Initial Public Offering. The moment a private company first lists its shares on a stock exchange and sells them to public investors. Often hyped, often volatile in the first months, often a bad time to buy, early shareholders (employees, early investors) usually sell into the hype.

Spain's personal income tax, combined national and regional, with progressive brackets.

The Impuesto sobre la Renta de las Personas Físicas, Spain's main personal income tax. It has a national base plus a regional add-on (which varies by autonomous community), applied progressively across several brackets after deductions like the personal minimum (mínimo personal).

How quickly you can turn an investment into cash without losing value.

A measure of how easily an asset can be sold for its fair price, on short notice. Cash is perfectly liquid; a global ETF is highly liquid; a flat is famously illiquid, you can't sell it tomorrow at full price.

The pain of losing $100 is felt about twice as strongly as the joy of gaining $100. The hidden engine behind panic selling.

A finding from behavioral economics (Kahneman & Tversky, 1979): humans weight losses roughly twice as heavily as equivalent gains. When your portfolio drops 10%, the felt pain is closer to a 20% gain in reverse. This asymmetry is why investors often sell at the bottom, the discomfort of watching the number fall outweighs the rational expectation that it will recover. Awareness alone helps; pre-commitment to a plan helps more.

The rate you pay on the next euro or dollar you earn, not on your whole salary.

The percentage of tax paid on each additional unit of income above your current bracket. In a progressive system, your marginal rate is always greater than or equal to your effective rate. People often confuse the two and assume they pay 37% on everything when they only pay 37% on the income that falls in the top bracket.

The total dollar value of all a company's shares. A rough measure of company size.

Market capitalization, the total value of all outstanding shares of a company, calculated as share price times number of shares. The standard way to size companies: large-cap (>$10B), mid-cap ($2-10B), small-cap (<$2B). Bigger isn't safer, but it usually means lower volatility.

A pooled investment that holds many assets. Like an ETF, but priced once a day.

A fund that pools money from many investors to buy a basket of stocks or bonds. Similar to ETFs in concept, but mutual funds price once per day (after market close), while ETFs trade continuously like stocks. Often have higher fees than ETFs, especially when actively managed.

UK payroll contribution funding the NHS, the State Pension, and unemployment benefits.

A UK contribution paid by employees on earnings above a threshold (Primary Threshold). For 2024/25 it is 8% on earnings between £12,570 and £50,270, then 2% above. NI funds the State Pension, the NHS, and a few other contributory benefits.

Selling investments out of fear during a downturn. The single most expensive mistake.

The act of selling investments during a market drop because the fear of further losses overwhelms rational thinking. Locks in what would otherwise be a temporary loss into a permanent one. Decades of behavioral data show this is the single most expensive mistake retail investors make.

Buying index funds and rarely trading. The opposite of trying to beat the market.

A philosophy of investing that accepts the market's return rather than trying to beat it. Done by buying broad index funds and holding them. The opposite is "active investing" (picking individual stocks or timing the market). Decades of data show passive beats active for the vast majority of investors over time.

The slice of income that the UK taxes at 0%, £12,570 for most people in 2024/25.

The income amount UK residents can earn each year before any income tax is charged. The Personal Allowance shrinks for very high earners (above £100k) and disappears entirely above £125k, but most workers receive the full £12,570.

The complete set of investments a person holds, considered as a single unit.

The full collection of assets a person owns, stocks, bonds, ETFs, cash. The mix between them matters more for long-term outcomes than picking the "right" individual investment.

The original amount of money you invested or borrowed, before any interest or returns.

The starting sum of money, what you originally invested or borrowed, separate from any interest, returns, or losses generated on top of it.

A tax where higher income is taxed at higher rates, but only the part above each threshold.

A tax design where the rate rises with income, but each rate only applies to the portion of income inside its own bracket. Most income taxes in Europe and the US are progressive. The opposite, a flat tax, applies a single rate to all income.

Your return after subtracting inflation. The number that actually matters.

The return on an investment after adjusting for inflation. The headline (nominal) number often looks impressive but tells you little until you subtract the inflation drag. Real return is what your money is actually worth more of, in things you can buy.

Periodically restoring your target allocation. Forces you to sell high and buy low.

The act of selling assets that have grown beyond your target weight and buying ones that have lagged, to bring your portfolio back to its intended mix. Usually done annually or when allocations drift more than 5%. Mechanically forces you to sell winners and buy losers, counterintuitive but historically rewarding.

The brain treats whatever just happened as a forecast of what will happen next. Disastrous in volatile markets.

A cognitive bias where recent events feel more representative of the future than they actually are. After a crash, every bear market headline feels like the start of a longer collapse; after a rally, the gains feel sustainable indefinitely. Recency bias drives investors to sell at lows ("this will keep falling") and buy at highs ("this will keep rising"). It's why a written, long-horizon plan beats reacting to the news.

A meaningful, sustained decline in economic activity. Stocks usually fall hard.

A significant decline in economic activity lasting more than a few months, technically defined as two consecutive quarters of negative GDP growth. Recessions usually mean lower corporate earnings, rising unemployment, and falling stock prices. They are part of the normal business cycle and are followed by recoveries.

A fund that owns real estate. Lets you invest in property without buying buildings.

Real Estate Investment Trust. A company that owns and operates income-producing real estate (office buildings, apartments, malls, hotels, data centers) and trades on a stock exchange like a stock. By law, REITs must distribute most of their income as dividends, so they tend to have high dividend yields.

The gain (or loss) on an investment, usually expressed as a percentage per year.

The gain or loss on an investment over a period, usually expressed as an annual percentage. "Nominal return" ignores inflation; "real return" subtracts it. The number to actually care about is the real, after-fee return.

The chance that an investment loses value, and how much it could lose.

In investing, the probability and magnitude of losing money. Often used loosely as a synonym for volatility, though they aren't the same thing, risk includes the possibility of permanent loss, not just temporary swings.

How much volatility you can stomach without panicking and selling.

Your personal ability to live with portfolio fluctuations without making emotional decisions. Different from risk capacity (how much risk you can financially absorb). The honest test: would you sleep through a 40% drawdown? If not, your risk tolerance is lower than the math says it could be.

The percentage of your portfolio you can withdraw each year without running out over a long retirement.

A back-of-the-envelope number that tells you how much you can sustainably pull from an invested portfolio each year, adjusted for inflation, without exhausting it. The famous 4% rule is the most common SWR, but the right number depends on your retirement length, asset mix, and starting valuations.

Setting money aside in a safe, accessible place, preserving what you have, not growing it.

Saving is the act of holding money in cash or near-cash instruments (a checking or savings account, a money-market fund) where the number stays roughly the same. The point isn't to grow your wealth, it's to have money available when you need it: emergencies, short-term goals, the next bill. Saving is the right tool for short horizons; over decades, inflation erodes its real value.

A bank account that pays interest on your deposits. Safe but low return.

A bank deposit account that earns interest. Insured by the government up to a limit (€100k in the EU, $250k in the US). Safe and liquid, but typical interest rates often barely match, or fall below, inflation, so it's not a place to grow wealth, just to park it.

The risk that bad returns early in retirement damage your portfolio more than the same returns later.

The same average return can produce very different outcomes depending on when the bad years happen. While accumulating, order doesn't matter, you average in. While withdrawing, a crash in the first decade is catastrophic: you sell shares cheaply for living costs, and there are fewer shares left to recover when markets bounce. It is the main reason the 4% rule fails in some historical scenarios.

A single unit of ownership in a company. Buying one share makes you a (very small) owner.

One unit of stock in a company. The terms "share" and "stock" are often used interchangeably, technically, "stock" is the asset class and a "share" is one unit of it. Companies issue millions or billions of shares.

Mandatory employee contribution that funds pensions, unemployment and healthcare in Spain.

A flat-rate contribution (around 6.48% for employees in 2024) deducted from gross salary up to a monthly cap. It funds the Spanish public pension system, unemployment benefits, and parts of public healthcare. The employer pays a much larger contribution on top.

The flat amount US filers can subtract from gross income before federal brackets apply.

A fixed reduction to taxable income that most US taxpayers claim instead of itemizing deductions. For a single filer in 2024 it is $14,600. Income up to that amount is effectively shielded from federal income tax.

A share of ownership in a company. You profit if the company grows; you lose if it falters.

Also called a share or equity. Buying a stock makes you a fractional owner of a real business, entitled to a proportional slice of its profits, dividends, and assets, however small your stake.

The other silent subtractor. Almost every gain you make is taxed somewhere.

The portion of investment gains the government takes, on dividends, on interest, on profits when you sell. Tax-advantaged accounts (pensions, ISAs, 401(k)s) reduce or defer this drag, which over decades adds up to a lot.

An income range with its own tax rate. You only pay that rate on income inside the range.

Income tax is split into ranges, each with its own rate. As your income rises, the part inside each higher range is taxed at that range's rate, but the lower parts keep paying their lower rates. That is why moving up a bracket never reduces your take-home pay overall.

An investment account where the government reduces or defers your taxes.

A type of investment account that gets special tax treatment to encourage long-term saving, usually for retirement. Examples: 401(k) and IRA in the US, ISA and SIPP in the UK, plan de pensiones in Spain. Either deferring taxes (pay later, on withdrawal) or removing them entirely on the gains. Should usually be filled before regular taxable accounts.

Rule of thumb: you can spend ~4% of an invested portfolio each year and it should last 30 years.

A widely-cited safe withdrawal rate popularized by the Trinity Study (1998). It says that with a 60/40 stock-bond portfolio, retiring on 4% of your starting balance, adjusted for inflation each year, survived almost every 30-year window in US history. Its inverse, 25× annual spending, gives the "FIRE number".

How many years until you actually need the money. Changes everything else.

The length of time you can leave money invested before you need to spend it. The most underrated input in any investment decision, a 30-year horizon and a 3-year horizon should lead to almost opposite portfolios.

A bond issued by the government. Considered the safest debt available.

Debt issued by a government, in the US, by the Treasury Department. Considered the lowest-risk investment in the world (governments rarely default in their own currency). Comes in various maturities: T-bills (under 1 year), T-notes (2-10 years), T-bonds (20-30 years).

The 1998 paper that tested historical retirement scenarios and gave us the 4% rule.

A 1998 study by three Trinity University professors (Cooley, Hubbard, and Walz) that simulated 30-year retirements starting in every year from 1926 onward, using a 60/40 stock-bond portfolio. They counted how many starting points survived various withdrawal rates. The 4% line survived ~96% of scenarios, the foundation of every "safe withdrawal" conversation since.

How wildly an investment's price moves up and down. High volatility = bigger swings.

A measure of how much the price of an asset fluctuates over time, usually expressed as annualized standard deviation. High volatility means bigger swings in both directions; low volatility means a calmer ride.

The income an investment generates as a percentage of its price, separate from price changes.

The cash income an investment produces, expressed as an annual percentage of its current price. A 4% yield on a $1,000 bond means $40/year. Often confused with return, but yield is just the income part, not the price changes.

The line drawn by bond yields at different maturities. Tells you what the market expects.

A chart of yields plotted against maturities (3 months, 2 years, 10 years, 30 years…). Normally it slopes upward: longer means more yield to compensate you for tying up money. When short rates exceed long rates, the curve "inverts", historically a strong recession signal.