Finance, like medicine, is full of jargon. You pick these words up over time with reading, and assimilate them into your vocabulary. It’s easy to forget they are confusing financial jargon to others. Please call me out to explain any jargon I have used in my post and I will build this glossary as the site builds.
Capital Gain is the increase in value of an investment. It is often expressed as a percentage growth in value over time. This is the increase in price of a stock over time, or improved property value. It excludes the yield part of investment return.
Consumer Price Index measures the price of an average market basket of consumer goods and services
Lemon in the context of financial matters, not referring to citrus fruit. A “lemon” is a purchase that performs poorly. It can be used to describe a purchased car that breaks down, or an investment that has hidden faults.
Median Growth the median average growth rate per year. For properties ths is the change in the median price property in a year. As a reminder, a median is the middle number within a series. So if three houses sell at $100,000, $200,000 and $900,000 the median would be $200,000 (as opposed to the mean average of $400,000).
Negative Equity is when your investment will sell for less money than you owe. A position to be avoided at all costs, as it traps you in a poorly performing asset. You may not even be able to sell, as you will need to pay out the extra debt owed. Generally used to describe the situation after buying a property than has fallen significantly in value.
Negative Gearing is a tax outcome that allows investment “losses” to be deducted against employment income. If rental income is not enough to cover mortgage interest, maintenance and property management, tax refunds to absorb some of that loss. This is a particularly useful for high income earners on the top tax bracket.
Negative gearing can be used with focused property or shares, but is reliant on capital growth to provide an overall positive return. Buy the wrong assets that fail to grow and negative gearing just means you are haemorrhaging money.
Sunk Cost Bias. Bias, as in medicine, is dangerous in investing. Sunk cost bias is the tendency for investors to continue with an investment despite evidence it was a poor chance due to the funds already contributed. It is psychologically hard to cut one’s losses because of the money lost already, and this can easily lead to throwing good money after bad.
Total Return is, as the name suggests, the total return on an investment. It is expressed as a percentage of the original investment. It comprises the capital gain (increase in value of an asset) and yield (rental income, dividends or interest received).
Yield. Is the cash return on an investment as a percentage. It can be gross (before costs) or net (after costs). Yield is the interest on a bank account, dividends received from stocks or rental income from a property. It excludes the capital gains part of the investment return.