-  By Mike Fortunato, CIM®, FCSI®

In the last installment, we discussed how many investors have unrealistic investment expectations.
Today we are going to examine what I believe to be the major causes of their outlook.

Financial Jargon

Finance, like any professions, has its own set of jargon that its practitioners employ. The list of
acronyms and other exotic sounding terms is almost endless; however, fancy sounding words &
phrases are rarely the source of confusion for investors. After all, when an advisor uses a word a
client is unfamiliar with, the client can easily ask him/her to explain the meaning of that word. I
believe the majority of confusion comes from the fact that finance jargon also repurposes many
common words & phrases we use in everyday life. This can create a lot of confusion for non-advisors
because words & phrases they use colloquially, might mean something completely different in the
finance world. This is more often than not exacerbated by lazy advisors who neglect to make the
distinction between jargon and colloquial language when conversing with investors. My favourite
example is the word, “risk” or “risky”. We all have a sense of what this means in everyday language,
but in the finance world, there are at least four definitions of risk (and probably a lot more) that impact
investors’ investment plans. They include: probabilistic risk, short-fall risk, absolute risk, and
variability or volatility risk. All of these types of risk are important, but in my experience, investors are
usually referring to the first three types of risk, while advisors are most often referring to the last type
– volatility risk. The end result is that both parties are talking about completely different things while
simultaneously thinking they are on the same page. To an outside observer, the idea of two people
having a full conversation, using different definitions for the same words, may seem funny, but the
situation is much less humorous to the people actually having the discussion, especially for the party
whose retirement account is at risk (pun intended).

“Risk”, isn’t the only regular English word with a unique definition in finance jargon. Here are a few
more words that are commonly used (that mean different things) by both advisors and investors: “risk-
free”, “consensus”, “annual return”, and “price”. Even the concept of “loss” and “gain”, are often
miscommunicated/misunderstood when advisors fail to elaborate on what they actually mean or
truncate the more appropriate phrases of “paper-loss” & “paper-gain”.

Words are just sounds we make with our mouths - what really matters is the definitions we all agree
correspond to those sounds. A sentence can have a radically different meaning if you change the
definition of just one word. Those differences matter a lot when the discussion is about formulating a
strategy. Finance jargon is designed to pack a lot of information into a short word or phrase, so the
onus is on the advisor to ensure their client is comprehending their message.

In light of the fact that some of the most commonly used phrases in finance have both multiple
meanings and different usages (normal and jargon), it isn’t a surprise that many clients have an
unrealistic view of potential risk and reward. My advice to advisors is to always remain cognizant of
the fact that clients are unfamiliar with finance jargon: especially when the particular jargon is a
homograph for more commonly used words. Great advisors should strive to empower their clients
with knowledge, and the tools to think critically in a financial context. It will always be much easier to
have a client temper their own unrealistic expectations than it is to debate them into changing their
mind about concepts they don’t fully understand.

There is so much to say about finance jargon, that I plan to dedicate an entire future post to common
phrases I mentioned above. In the next installment of this article, I plan to illuminate another factor
that has contributed to investors’ unrealistic investment expectations: flaws in how we analyze past
performance & risk. Until then, I’d like to end with a quote. A wise man once said, “Lorem ipsum
dolor sit amet, consectetur adipiscing elit, sed do eiusmod tempor incididunt ut labore et dolore
magna aliqua.”, and I still don’t know what he was talking about!