Investment Glossary

A long-term investment strategy of purchasing securities and holding them regardless of short-term market fluctuations. Most effective when applied to companies with structurally durable competitive positions.

The choice between passive index investing through ETFs and active selection of individual stocks. Both approaches have structural advantages depending on investor goals, information, and capabilities.

An investment strategy focused on companies with above-average revenue and earnings growth potential, often trading at premium valuations. Growth investors pay for future earnings power rather than current cheapness.

The internal rate of return (IRR) is the annualized rate that makes the net present value of all portfolio cash flows equal to zero. Unlike TTWROR, it rewards or penalizes you for the timing of deposits and withdrawals.

Maximum drawdown (Max DD) measures the largest percentage decline from a portfolio's peak value to its subsequent trough before recovering to a new high. It is the most direct measure of how much pain a strategy has historically inflicted.

An investment strategy based on the empirical observation that assets which have performed well recently tend to continue performing well in the near term. One of the most robustly documented return factors in academic finance.

Portfolio diversification reduces risk by spreading investments across assets whose returns are not perfectly correlated — so that losses in one holding are not replicated across the portfolio simultaneously. It is the only 'free lunch' in finance: lower risk without necessarily sacrificing expected return.

Portfolio rebalancing is the process of restoring a portfolio to its target allocation after market movements have caused individual positions to drift. It is the disciplined mechanism that keeps a portfolio's risk profile aligned with its design intent.

Risk management in investing is the systematic process of identifying, measuring, and controlling the risks that can erode portfolio value — from market risk and concentration risk to structural business risk. It is not about avoiding risk but about ensuring it is intentional, understood, and proportionate to expected return.

The Sharpe ratio measures how much excess return a portfolio generates per unit of total risk (standard deviation). A higher Sharpe ratio means more return for each unit of volatility taken.

The Sortino ratio is a variation of the Sharpe ratio that only penalizes downside volatility (returns below a target). It rewards portfolios with strong upside while ignoring beneficial upward swings.

The time-weighted rate of return (TTWROR) measures investment performance by eliminating the distorting effect of deposits and withdrawals. It shows how your stock picks and allocation decisions performed, independent of when you added or removed capital.

An investment philosophy focused on buying securities that trade below their estimated intrinsic value, with a margin of safety. The foundational approach of Benjamin Graham and Warren Buffett.

Volatility, in a portfolio context, is the annualized standard deviation of daily returns. It measures how widely returns fluctuate around their average, serving as the most common quantitative measure of risk.