Financial jargon explained for global investors

INVESTMENT JARGON *Page Summary: A financial dictionary of explanations for the investment beginner*
Asset Allocation Best Guess Bottom-Up Coppock Curve Current Account EPS Equity Risk Premium Forex Index Market Timing Mkt. Cap. Momentum Moving Average Odds P/E Ratio Real Effective Exchange Rate Real Interest Rate Real Yield SmallCap Spare Capacity Style Top-Down Total Return Value Yield
*Tactical Asset Allocation*	Asset Allocation: - The process of risk reduction by diversification, not just between different stocks and shares in one's home market, but by allocating proportions of assets between different asset classes or different countries. The latter is called global asset allocation. Tactical asset allocation is the use of market timing to adjust the balance to reduce risks and maximise performance. Investors RouteMap engages in both global and tactical asset allocation. Strategic asset allocation is the judgement of an appropriate risk profile in response to age and financial circumstances.
*Read conceptual analysis*	Best Guess (alias estimate, forecast, prediction, picks & tips): - We chose this term for means of looking into the future to remind subscribers about the level of uncertainty in an activity, where to get the direction and order of magnitude right and be on the right side of average more often than not represents out-performance.
*The advantages of our Investment Phiposophy*	Bottom-Up: - An intellectual approach for analysing whole markets by aggregating the sum total of individual companies. This approach has a bias towards optimism because analysts' estimates are based on what the companies tell them, and they generally can't see beyond the end of their order book. However it does recognise the influence of company specific factors, which top-down analysis ignores. Please note that Investors RouteMap relies solely on top-down analysis.
*See a sample Coppock Curve* *Check technical track record* *See also Moving Averages*	Coppock Curve: - An investment tool used in technical analysis for predicting bear market lows. This concept was invented by Edwin Coppock in 1962 and based on the idea that bear markets are like bereavement. The curve is constructed by making time weighted moving averages of between 11 and 14 months. An upturn from levels below zero generates buy signals. These have proved highly successful, but the corresponding sell signals do not work so well. A modified version of the Coppock indicator is a component in our technical investment model for foreign currency, government bond and stock markets worldwide.
*Analysis of Current Account / GDP*	Current Account = Exports of Goods & Services - Imports of Goods & Services: A high deficit is often seen as a risk of devaluation. However this may not necessarily be the case if offset by capital inflow from foreign investors, or repatriation of earnings by workers overseas, so it is more useful to look at changes in the ratio of Current Account / GDP over time in each country. This is included in the library of charts of our Forex RouteMap because it is a useful warning indicator. However it is not a component of predictive model.
*See example and analysis*	EPS (alias Earnings per Share) = After Tax Profits / Number of Issued Shares: - This is the most widely used, and often abused, basis for valuing shares as it adjusts for new share issues and takeovers. While it is now supplemented by a variety of other sophisticated analytic measures, it retains its value for simplicity, wide usage, and long historic data runs. Apart from the United States there are no official time series for whole market EPS, so we have calculated our own series for all countries in our Shares RouteMap. Data quality issues mean that these should be seen only as a historical reconstruction.
*See 25 year sample chart of Equity Risk Premium*	Equity Risk Premium = Return on investment in equities - Return on risk-free assets: - Typically the return on equities is defined as dividend yield + capital gains over some specified period and the the risk-free return is the current yield on long term government bonds. However this calculation is both meaningless as it compares a backward-looking stock market statistic with a forward-looking bond market statistic and also pointless as capital gains depend on the choice of starting and end dates. Instead the valuation strategies in Investors RouteMap compare PE ratios and bond yields for developed markets. Owing to the lack of local currency government bonds in emerging markets, we also compare PE ratios and short term interest rates across all markets.
*Visit Forex in Demoland*	Forex (alias Foreign Exchange): - While many currencies generally trade freely against each other, that is not necessarily the case. Some are fixed permanently against each other, as in the Euro since 1/1/1999, others are fixed until further notice by government policy, as in the case of Hong Kong and Argentina and a few countries employ a crawling peg policy by which the exchange rate depreciates at a fixed rate to adjust for inflation, as in Chile, Hungary or Israel. Subscribers to the Forex RouteMap should bear this in mind.
*Read description of the P/T Global Market Indexes*	Index = Sum of Mkt. Cap. for all companies - changes in issued capital:- Widely respected as indicators for overall performance in bond or stock markets, price indexes normally exclude dividend income, unless described as Performance Indexes or Total Returns. We calculate our own P/T Indexes for each asset class, specially designed for investment decision-making.
Bond Market Timing Forex Market Timing Stock Market Timing *Investing Style Timing*	Market Timing: - The alternative to the conventional "Buy and Hold" investment strategy. Decisions to get in or out of the stock market are typically based on research into economic cycles, chart technical analysis or contrarian indicators of investment sentiment. At one extreme short term traders may use the futures markets to do this for an entire portfolio even on an intra-day basis, while at the other extreme pension funds may make only marginal changes every few months. During the great one-way bull market since 1982, market timing has fallen out of fashion in favour of asset allocation, but that can change if markets resume cyclical fluctuation.
*Apply this analysis round the world*	Mkt. Cap. = Share Price x Number of Issued Shares: - The ratio of Mkt. Cap. / GDP is an important investment tool, that enables investors to adjust for temporary extremes in company profits during booms and recessions. This ratio is similar to the Price / Sales analysis for individual companies, much favoured by corporate aquirers. That is why it is one of the valuation tools used in the Shares RouteMap.
*See the results of our momentum strategies*	Momentum = Rate of Change: - Often dubbed "the trend is your friend", this school of investment believes in running winners, and cutting losses. It has the great advantage that one can participate in a winner, without knowing why, as the reasons for success often only become general knowledge later. However there is the risk of frequent whip-sawing as it takes time to identify a trend, and by definition momentum investors never buy low. Our rating systems take into account both momentum and value philosophies of investment.
*See moving averages applied in action*	Moving Average = Average(T1.....T?): - Much like the Dolby noise reduction system, this not only reduces the statistical influence of erratic factors, but also makes charts more readable. To reduce noise in the charts, we take a single point month-end price to eliminate daily fluctuations and also use averages of up to 12 months. Some of these may be time weighted to give greater significance to the latest data. The technical models use moving averages in combination with the Coppock curve. Results of our Lab Tests show this technical algorithm to be very successful.
*Trade on Seasonal Patterns*	Odds = Percentage Chance of Profit: - That is to say 66% represents odds of 2:1. This is our preferred method for expressing our Best Guess when using annual seasonal trading patterns. We also use odds in Lab Tests to describe the proportion of countries in which a given strategy proved successful in the past.
*Apply P/E ratios to compare shares with other assets* *See also Coppock Curves* *See also Equity Risk Premium*	P/E Ratio = Share Price / Earnings per Share: - This has traditionally been the best yardstick for measuring valuation for shares, because it includes both retained and distributed profits. While this ratio is now supplemented by a variety of other sophisticated valuation tools, it retains the dominant valuation role on account of its simplicity, widespread use and long historic data runs. We use it to compare the valuation of shares against alternative liquid investments, specifically government bonds and cash held in short term deposits, as our version for the equity risk premium.
*Use real effective exchange rates for foreign currency analysis*	Real Effective Exchange Rate = Average exchange rate adjusted for inflation. This is a complex calculation. An average exchange rate index (alias effective exchange rate) against major trading partners is first calculated by weighing each according the significance it represents in terms of imports and exports. Next a similar index is calculated to establish a weighted average index of consumer prices in the trading partners. This is then adjusted for the rate of domestic inflation, to create an index of relative inflation. Finally the average exchange rate is divided by the relative rate of inflation to turn the effective exchange rate into a real effective exchange rate. Changes in this index are the best way to see if a currency is becoming over- or under-valued.
*Check out this tested investment stategy*	Real Interest Rate % = Short Term Interest Rate % - Inflation %: - This provides a fair measure of return to investors who leave money on deposit, after allowing for inflation. We use the last 12 months increase in the consumer price index as an indicator of generally expected inflation. As probably the single most important measure of economic policy, we use trends in real interest rates to predict the direction of foreign currency movements, government bond and stock markets.
*See also Yield %*	Real Yield % = Yield % - Inflation % p.a.: - This provides a fair measure of return to investors in long term bonds after allowing for inflation. We take the last 12 months increase in the consumer price index as an indicator of generally expected inflation. The Bonds RouteMap uses real yield as its measure of value.
*Check out markets by size*	SmallCap (alias Companies with low market capitalisation): - These typically represent the smallest 10% of a stock market in terms for market capitalisation, but account for the vast majority of shares by number. While different players use different definitions, $1 Bill. may generally be regarded as a ceiling. Almost by definition when seen from an international perspective, SmallCaps have greater significance in the stock markets of smaller countries. SmallCaps are one of the investing styles analysed in our Styles RouteMap.
*Study GDP Output Gaps*	Spare Capacity (alias GDP Output Gap) = Potential GDP - Actual GDP: - Simple in theory, but difficult to calculate in practice, as there are no figures for potential GDP. Because of their importance in predicting all kinds of markets, we have made our own estimates, which track those of leading supranational organisations closely enough for our purposes.
*Check out the Styles RouteMap designed jspecifically to pick winning investment styles*	Style Investing (alias investment fashions):- This refers to particular intellectual approaches employed by investment managers to differentiate themselves either within a region or globally. The most common are growth or momentum managers, and value players as well as specialists on smaller companies, technology or commodities.
*The advantages of our Investment Phiposophy*	Top-Down: - An intellectual approach for analysing whole markets by using economic data, for predicting market direction, and estimating profits growth. This approach has the advantage that it sidesteps the positive bias of bottom-up analysis that results from listening to the managements of companies, but it has the weakness that it usually fails to take into account company specific factors. Please note that Investors RouteMap relies solely on top-down analysis.
*Learn more about our proprietary P/T Indexes*	Total Return = Capital Gains + Foreign Exchange Gains + Yield: - Long established stock market indices were traditionally calculated based on price movements alone, owing to the additional complications of computing yields. However both the need and ability for total return indexes has grown over the past two decades. The need has grown from the requirements for performance measurement of fund managers and growing computing power has provided the ability. The DAX and Wilshire Indexes are the best known total return indexes. Unless stated otherwise Investors RouteMap are calculated using price only, as these are intended as barometers of market behaviour and not for performance measurement of funds.
*See also Spare Capacity and Momentum*	Value Investing:- Like beauty, value is in the eye of the beholder, as there are many alternative definitions to choose between. Value investing strategies have the advantage that they enable investors to buy low and sell high, but the disadvantage that they may take a long time to pay off. Value strategies tend to work well in times of strong economic activity and inflation. The amount of spare capacity in the economy is usually low on such occasions. Our rating systems take into account both momentum and value philosophies of investment.
*See also Real Yield %*	Yield % = Dividend / Price: - Only the regular annual income of an investment is included. Thus this excludes special dividends for distribution of capital gains eg. by US closed end funds, and for bonds it excludes the pro-rata annualised difference between current price and redemption value, which is known as the redemption yield. Yield is normally expressed in terms of pre-tax return to a foreign investor, and excludes any tax credits to local investors. While foreign governments often withhold a proportion of the dividend, this can usually be offset against income tax in an investors home market. Results from the Lab Tests of our investing strategies are available both with and without including yield.

INVESTMENT JARGON