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Part: 5 Here's Our Advice > Glossary - Pg. 293

Glossary 293 publicly traded company A company whose shares of common stock are held by the public and are available for purchase by investors. The shares of publicly traded firms are bought and sold on the organized ex- changes or in the over-the-counter market. The Securities and Exchange Commission regulates such companies. qualified retirement plan A plan sponsored by an employer to provide retirement benefits for employees that meets cer- tain regulatory requirements. The employer may deduct contributions to the plan, and the em- ployees do not include benefits in their taxable income until they're received, usually after they retire. rebalancing Reallocating an existing account balance. For example, a particular account is planned to have a mix of 60 percent stocks, 30 percent bonds, and 10 percent cash. Over time, stocks may grow faster than bonds or cash so that stocks become more than 60 percent of the portfolio. This makes the overall portfolio more aggressive than intended. Rebalancing periodically helps to maintain the intended mix. redemption Sale of mutual fund shares by a shareholder back to the fund. Commonly, the term is used interchangeably with exchange. refund annuity An annuity that provides fixed payments as long as the annuitant lives and that guarantees repayment of the amount paid in. If the annuitant dies before receiving the amount paid in for the annuity, the balance is paid to the bene-ficiary. regulated investment company Generally referred to as a mutual fund company. An investment company must meet certain requirements to avoid paying federal income taxes on distributions of dividends, interest, and realized capital gain. To qualify, a regulated investment company must derive at least 90 percent of its income from dividends, interest, and capital gain, and distribute at least 90 percent of the dividends and interest that it receives to its shareholders (who are then taxed on them). It is also required to diversify its assets. reinvestment plan Arrangement in which fund distributions are used to purchase additional shares rather than being returned in cash to the shareholder. At most fund companies, no sales loads are charged on reinvested funds, unless they are redirected to a fund with a higher sales load. return The amount that an investment earns, stated as a percentage of the amount invested for a period. risk The potential for losing money or the buying power that money provides. There are many types of risk. Some of the most important ones are interest rate risk, market risk, inflation risk, credit risk, and business risk. risk aversion Most investors will avoid a risky investment unless sufficiently rewarded. Thus, if two invest- ments offer the same expected yield but have different risk characteristics, investors will choose the one with the lesser chance of loss. rule of 72 A mathematical formula for determining how long it takes a given investment to double in value. Dividing 72 by the annual rate of return will show the number of years required to double an investment. Thus, for example, an investment expected to earn 9 percent annually will double the investor's funds in eight years (72 divided by 9). Dividing 72 by the number of years in which the investor wants to double his funds will give the necessary rate of return.