Certified financial planner Wes Moss provides personal finance advice and accessible investment strategies. His guest post appears here Monday mornings.
Economics and financial planning are all about numbers –- budget figures, interest rates, savings goals. But there are some pretty important letters involved as well, most of which represent… numbers. Here’s a quick primer on the ABCs of money.
GDP stands for Gross Domestic Product, which is the total value of all the goods and services produced annually by a country’s economy. The U.S. GDP is currently around $15 trillion. Ideally, we’d like to see that figure grow at a rate of about 2 percent to 3 percent per year, after inflation.
CPI is the Consumer Price Index, which measures inflation. CPI is a very important number to investors and retirees. Social Security payments, pension benefits and some investments — including I Bonds and TIPS — are tied to inflation as measured by CPI. The Federal Reserve wants to keep this number low; but it also wants to see some growth in prices, preferably about 1.5 percent to 2.5 percent per year. A rate below that range prompts worries about deflation, while higher rates stir concern about hyper-inflation.
EPS means Earnings Per Share. EPS is calculated by dividing a company’s profit by its number of common outstanding shares. If a business earning $2 million in one year has 2 million common shares of stock outstanding, its EPS would be $1 per share.
We’ve just entered earnings season, and it’s off to a strong start. Blue chip companies like Alcoa, JP Morgan, Apple and Coca-Cola have all reported big increases from this time last year. Most estimates expect companies to show a 10-11 percent overall increase in earnings (or EPS) over the same period one year ago.
FTG stands for Filling the Gap, my simple approach to determining how much money your investments need to generate to fund your retirement. First, add up your guaranteed sources of monthly retirement income, such as Social Security and any pensions you’ve earned. Next, tote up all your monthly retirement spending needs. Subtract your spending from your guaranteed income and you’ve identified your Gap.
One of my favorite investment vehicles –- the ETF, or Exchange-Traded Fund — is essentially a vehicle that holds and tracks a “basket” of securities (i.e. stocks, bonds or commodities). These “baskets” are traded on a given stock exchange throughout the day. An ETF may track the broad S&P 500 or only a sliver of the market. For example, SPY is a broad stock market ETF that tracks all the stocks in the S&P 500 — think of it as “the whole pie.” However, a utility ETF like XLU holds only “a piece of the pie,” and consists only of utility related companies. Even though ETFs are “baskets of stocks, bonds, or commodities,” they generally function or trade as if they were stocks, making them a great way to easily diversify your portfolio at a very low cost.
In next week’s post we’ll pop the hood on an important ETF and talk about the underlying components or “ingredients” — the most important part of any ETF recipe.
Are there economic or financial acronyms of which you are unsure or confused about? I’m happy to answer any questions.
– By Wes Moss, for Atlanta Bargain Hunter