If your knowledge of investment terminology is limited – or even if you have done a bit of it over the years – Bob Kaye’s How To Avoid Not Having Enough Money To Live On After Retirement delivers a lot of info in a fun, crossword-laden way.

While the book is aimed at U.S. readers (several chapters are devoted to the ins and outs of the tax system south of the border) the investment overview material is good for anyone.

The first chapter reassures us with a quote from the great Warren Buffett – “to invest successfully over a lifetime does not require a stratospheric IQ, unusual business insights, or inside information. What’s needed is a sound intellectual framework for making decisions and the ability to keep emotions from eroding that framework.”

On inflation, Kaye warns that “if inflation moves upward at four per cent, then the cost of living will double every 18 years…. (and) in 36 years, $1 million will be worth only $250,000.” That’s why people need higher returns on investments than the rate of inflation, he explains.

He makes a distinction between long and short-term investments. “Due to the frequent ups and downs of stock investments, they are usually only a correct investment for the long term, four to five years, or more.” If you are saving not for say, retirement, but for a short term goal, “a time horizon (of) less than four to five years,” it is better to invest in a savings account or “fixed income” investments.

He sees stocks as the most important investment category for long-term investing.

“Stocks should constitute the overwhelming proportion of all long-term, financial portfolios. Based on historical evidence, even the most conservative investors should place most of their financial wealth in common stocks,” the book quotes Jeremy Siegel as saying.

Stocks provide you “a share of ownership in a company,” and the value of them “goes up and down with the value of the company.” Bonds, on the other hand, “are a loan from you to a government or large corporation” that is paid back with interest.

Kaye sees equity investment as “insurance against living too long” as they tend to appreciate in value over time and often pay you income via monthly or quarterly dividends. Bonds tend to pay you interest twice a year, the book explains.

He notes that a “small cap” investment refers to shares in a company that is valued at $300 million to $2 billion; “medium-cap” is $2 to 10 billion and “large cap” refers to companies values at more than $10 billion, such as “Microsoft or Disney.”

Kaye also explains the difference between “value investing” and “growth investing.”

“The manager… who buys stocks at a bargain and waits for them to increase in value is said to be managing a `value’ fund,” he writes. If the goal is to “buy stocks which are steadily increasing in value,” it’s a growth fund. “Neither of these two strategies may be superior, but rather, they complement each other,” he notes.

“Rebalancing” refers to “periodically rebalancing the percentages of (securities) in a portfolio to their original allocations.” As one security will do better and another worse, rebalancing “automatically sells high and buys low, which is a positive way to earn more income on investments.”

He presents a “diversification scale” which explains that if your portfolio contains “a few stocks and bonds in the same asset class” it is not diversified. If you have a portfolio containing “10 to 20 stocks and 10 to 20 bonds” you are, Kaye writes, “barely diversified.” He sees a “well diversified” portfolio as having “several mutual funds in different asset classes,” along with many dozen stocks or bonds.

Kaye concludes his book, which is laden with crosswords, interesting famous investing quotes, graphics and charts, by hoping readers are now “more proficient in the basic terminology which is the foundation of investments and retirement planning.”

A message of Kaye’s book is that a diversified basket of investment “eggs” is preferable to owning only one or two things. Members of the Saskatchewan Pension Plan, open to all Canadians with registered retirement savings plan room, can rest assured that their savings are well diversified. The SPP Balanced Fund features investments in Canadian, U.S. and Non-North American equities, real estate, infrastructure, bonds, mortgages, private debt and short-term investments.

Check out SPP today!

Join the Wealthcare Revolution – follow SPP on Facebook!