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Market wisdom from one of Canada’s most respected professional investment managers

By Patrick McKeough  | Monday, August 04, 2014

Every industry and group has its own special jargon. This specialized language always has the same purpose. It simplifies communications within the industry, and helps make insiders feel they are part of a tightly-knit community. It also helps the group pursue its goals. It shapes concepts that will establish lines of thought and discussions that match the industry’s view of the world. But it can be confusing for those who are not insiders in the group.

This natural human tendency has probably been going on ever since language began.

Many will recall George Orwell’s classic novel written at the dawn of the Cold War, 1984. In the book, the totalitarian government that rules the English-speaking world has decided to replace English with an invented language called Newspeak. This new language uses lots of English words, but it defines concepts in such a way that forbidden ideas are difficult, if not impossible, to express.

For instance, Newspeak has no word for “free” in the political sense, although there are ways to say that a mattress is free of fleas.

Jargon as a sales tool

You may have noticed that your broker sometimes uses unfamiliar words and phrases to describe investment concepts. Some of this stock broker jargon is simply shorthand that brokers use amongst themselves, to refer to familiar situations without having to go into any detail on the underlying concept. However, the concepts that these “broker-ese” words and phrases represent also serve to further the goals of the brokerage business.

If you find yourself thinking in broker-ese, you’ll naturally make assumptions that are in tune with the goals of your broker. They may be out of tune with yours.

Why you can afford to have some “dead money” in your portfolio

Here’s just one example of how brokerspeak could work against you. From time to time your broker may advise you to sell a particular stock you own because it represents “dead money.” This doesn’t mean there’s anything wrong with the stock or the company. Rather, your stock broker thinks the stock may only go sideways for a period of months or longer, producing no capital gains for you. So he naturally feels you should sell it and buy something with better short-term capital-gains potential.

To do so, of course, you have to pay one commission to sell and another to buy. You may also face some costs from the bid-ask spread. If you make money on the sale and the stock is outside your RRSP or other registered account, you’ll have to pay capital-gains taxes, which will leave you with less capital to reinvest.

Taking all that into account, putting up with a little “dead money” in your portfolio doesn’t seem so bad.

Besides, many stocks qualify as “dead money” much of the time. That’s because they go sideways over long periods; their biggest gains occur in unpredictable spurts. Risk is relatively low in a high-quality stock that is going through a “dead-money” phase, by the way. But profits can be spectacular when it comes back to life.

Rather than trying to stay out of so-called “dead-money” stocks, it’s better to focus on building a portfolio that can produce a growing stream of dividends for you, plus long-term gains.

That’s your goal as an investor. It differs and often clashes with the goal of the brokerage business, which is to sell you investments.

This post originally appeared on TSI Network, © 2014 TSI Network.

Patrick McKeough, host of the investment website, has been a professional investment analyst for more than three decades. He is also a portfolio manager and the editor and publisher of four investment advisories: The Successful Investor, Wall Street Stock Forecaster, Stock Pickers Digest, and Canadian Wealth Advisor. Follow Pat on Twitter and Facebook.

Notes and Disclaimer

© 2014 by Fund Library. All rights reserved. Reproduction in whole or in part by any means without written permission is prohibited.

The foregoing is for general information purposes only and is the opinion of the writer. No guarantee of investment performance is made or implied. It is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice. Please contact the author to discuss your particular circumstances.

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