Investment

You want to invest now to help ensure a comfortable tomorrow. You need basic information so you can make decisions about your investments.

• Your portfolio mix is perhaps the single most critical factor in determining your investment success. Asset allocation is a strategy designed to increase investment return while limiting the downside of risk by spreading dollars among the three broad asset classes – stocks (equities, bonds, and cash/cash equivalents (money market funds, savings accounts, CDs, etc). Each asset class provides a distinctly different rate of return and level of risk. The use of diversification and asset allocation as part of an overall investment strategy does not assure a profit or protect against loss in a declining market.
  
  
• Diversifying via asset allocation makes you less dependent on the success of a single asset class. When you start developing your allocation strategy, there are three key factors to consider:
  
  
• Investment Objectives: When allocating your assets, your main goal is to increase your return over the long term. Part of that goal is the accumulation of capital or preservation of principal. A successful strategy should therefore create a balance among stocks, bonds, and cash/cash equivalents that will help you reach your goals with minimal risk of loss. The use of asset allocation does not guarantee returns or insulate you from potential losses.
  
  
• Level of Risk Tolerance: All investments involve some degree of risk. In order to realize higher returns, you must be willing to take on more risk. Your overall goal should be to diversify your investments according to the level of risk that you are most comfortable with. When assessing your risk tolerance, consider such factors as your age, your investing experience and the number of years until your retirement.
  
  
• Investment Time Horizon: Generally, the longer your time horizon, the more risk you can assume because you have more time to recover from market downturns and benefit from its upturns. As retirement age approaches, a typical investor reduces the percentage of assets allocated to stock funds and increases allocations in bonds and cash/cash equivalents.
  
  
• Dollar Cost Averaging: Invest on a regular basis (monthly or quarterly) regardless of which way the market is going.  Regular investing is a good way to avoid the frustrating and costly task of trying to “time” the market’s unpredictable highs and lows. Dollar cost averaging does not assure a profit and does not guarantee against a loss in a declining market.
  
  
• Rebalancing Your Portfolio: Be sure to review your asset allocation on a regular basis. Market fluctuations can cause your allocation percentages to get out of balance and you may end up with a portfolio that is more aggressive or conservative than you originally intended. Rebalancing helps you maintain your original allocation strategy and keep your investment goals on track.
  
  
• Re-Examining Your Asset Allocation: Your personal situation and long-term expectations will most likely change over time. Changes in living conditions and income (marriage, divorce, children, promotion, unemployment, career change) and adjustments in investment objective (tuition, mortgage payments, retirement, aging) may impact your allocation strategy. When these changes occur, you may want to revise your allocation percentages to accommodate your changed circumstances.
  
  Understanding Your Investments:
  
  
• Stocks (High Return with High Risk): Common stocks, or equities, represent ownership rights in a corporation, including the right to receive dividends and share in the company’s capital growth. While they offer the highest potential return, they are vulnerable to substantial short-term risk, offer no guarantee of return and could lead to a loss of principal.
  
  
• Domestic (U.S.) Stock companies
• “Small-Cap” Companies are generally those companies whose market value and shares outstanding is less than $1 billion. These are small, emerging firms with the potential for fast growth. A higher risk than larger, more established companies, they are generally more suitable for the younger, more aggressive investor. Stocks of small or emerging companies may have less liquidity than those investing in larger, established companies and may be subject to greater price volatility and risk than the overall stock market.

• “Mid-Cap” Companies are generally those companies whose market value and shares outstanding is between $1 and $3 billion. They include large and small companies and tend to perform somewhere in between small- and large-cap companies. They are generally a suitable investment for less aggressive, young-to-middle-aged investors.

• “Large-Cap” Companies are generally those companies whose market value and shares outstanding is greater than $3 billion. These are large, established companies with histories of steady growth. They are generally suitable for investors nearing retirement and seeking steadier returns and lower risk

• International (Foreign) Stock Companies
• Established-Market Companies are foreign firms located in countries (such as Germany and the United Kingdom) with developed economies.
  
  
• Emerging-Market Companies are foreign firms in countries (such as Mexico and Brazil) with less developed economies.
  
  
• Investing internationally involves risk not associated with investing solely in the United States of America, such as a currency fluctuation, political risk, differences in accounting and the limited availability of informat

• Style: Another consideration is the choice between “growth” and “value” stocks.
• Growth Funds include stocks of young, fast growing firms with high earnings potential and continual growth in earnings per share year after year.
  
  
• Value Funds include stocks of older, more established companies whose share prices appear to be low relative to their earnings potential. Value funds seek to buy stock shares when they are under priced and take profits when shares appear overvalued

• Bonds (Moderate Return with Lower Risk): Bonds are loans issued by a debtor, such as a corporation or the government, and bought by a creditor, such as an individual or mutual fund. Bond funds tend to offer a higher and steadier return than cash/cash equivalents, but when interest rates rise, bond prices decline. Bonds are subject to market risk and may be worth less if sold prior to maturity. Investments in higher yielding, lower rated bonds are subject to more risk than higher rated, lower yielding bonds.
  
  
• Investment-Grade Bond Funds
• Treasury Bonds are issued by the U.S. Government and offer the highest level of safety.

• Mortgage-Backed Bonds are investments in the securities of the U.S. government and its agencies. These investments usually offer a high level of safety of principal but the values are not guaranteed by these entities.

• High-Grade Corporate Bonds are issued by stable U.S. corporations and represent investment grade quality debt.

• International Bonds are issued by foreign corporations or governments of established countries with developed economies. Investing in international bonds involves risks not associated with investing solely in the U.S., such as currency fluctuation, political risk, differences in accounting and the limited availability of information.
  
  
• High-Yield Bond Funds
• Corporate Bonds are issued by corporations in financial difficulty or by new corporations with limited financial history.
  
  
• International Bonds are issued by corporations or governments of emerging foreign countries with less developed economies.
  
  
• Funds that invest in high-yield securities are subject to greater credit risk and price fluctuations than funds that invest in higher-quality securities

• Cash/Cash Equivalents (Lowest Return with Lowest Risk)
• This investment class is designed to preserve the original investment while paying low interest. The return rises and falls with changes in the short-term interest rate. This class typically includes savings accounts, money market funds, and certificates of deposit (CDs).

• Money market funds are not insured or guaranteed by the Federal Deposit Insurance Corporation or any other federal government agency. Although they seek to preserve the value of your investment at $1.00 per share, it’s possible to lose money by investing in money market funds.