Investing for Retirement with Mutual Funds

You can invest in all three major asset classes through mutual funds, which pool your money with that of other investors. Each fund’s manager selects specific securities to buy based on a stated investment strategy.

Mutual funds offer two key benefits. Because most mutual funds own dozens or hundreds of securities, you achieve greater diversification than you would by buying a few individual securities on your own. Also, the fund manager’s expertise is part of what you pay for in buying mutual fund shares.

A mutual fund may invest in one of the three major asset classes, or combine them. For example, a balanced fund typically includes stocks and bonds. With an actively managed mutual fund, the fund manager buys and sells specific securities, trying to beat a benchmark index such as the S&P 500. A passively managed or index fund tries to match the return of a specific index by holding only the securities included in that index.

Some mutual funds attempt to tailor each fund’s asset allocation not only to your risk tolerance, but to how soon you expect to use that money. These types of funds, known as life cycle or target-date funds, tend to set and adjust a given asset allocation based on a given date in the future, shifting the mix of investments gradually over time to increase the focus on capital preservation as the target date approaches.

Life cycle or target date funds tend to be available in series; each fund in the series targets a different time horizon. The “target date” is the approximate date when an investor expects to begin withdrawing money from the fund. For example, someone investing for retirement in a fund with a target date of 2030 typically expects to retire in 2030 and begin tapping the fund for income.

With target date funds, the principal value is not guaranteed at any time, including at the target date. There is no guarantee that a target date fund will meet its stated objectives. It is important to note that no two target date funds with the same target date are alike. Typically, they won’t have the same asset allocation, investment holdings, turnover rate or glide path. It is important for an investor to look beyond the target date to determine if a particular target date fund is an appropriate investment.

Note:  Mutual funds are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.

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IMPORTANT DISCLOSURES

Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, or legal advice. The information presented here is not specific to any individual’s personal circumstances.
To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax and legal professional based on his or her individual circumstances.
These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.

This communication is strictly intended for individuals residing in the state(s) of PA. No offers may be made or accepted from any resident outside the specific states referenced.

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2017.

Types of Retirement Plan Investments: Stocks

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How do stocks work?

When you buy a company’s stock, you’re purchasing a share of ownership in that business. You become one of the company’s stockholders. Your percentage of ownership in a company also represents your share of the risks taken and profits generated by the company. If the company does well, your share of its earnings will be proportionate to how much of the company’s stock you own. Of course, your share of any loss also will reflect your percentage of ownership.

Stocks by size
SizeDescription
Large cap
  • $10+ billion
  • Widely bought and sold
  • Often are well-known names
Midcap
  • $2 billion-$10 billion
  • Somewhat smaller than large caps
Small cap
  • $200 million-$2 billion
  • Less widely traded
  • Fewer institutional investors
Microcap
  • $20 million-$200 million
  • May trade infrequently
  • More difficult to research

Note:  Different organizations define these ranges in different ways, and the ranges can vary over time.

If you purchase stock, you can make money in one of two ways. The company’s board of directors can decide to distribute a portion of the company’s profits to its shareholders as dividends, which can provide you with income. Also, if the value of the stock rises, you may be able to sell your stock for more than you paid for it. Of course, if the value of the stock has declined, you’ll lose money.

The role of stocks in your retirement portfolio

Though past performance is no guarantee of future results, stocks historically have had greater potential for higher long-term total returns than cash alternatives or bonds. However, that potential for greater returns comes with greater risk of volatility and potential for loss. You can lose part or all of the money you invest in a stock. Because of that volatility, stock investments may not be appropriate for money you count on to be available in the short term. You’ll need to think about whether you have the financial and emotional ability to ride out those ups and downs as you try for greater returns.

The universe of stock mutual funds offers flexibility to construct a portfolio that is tailored to your needs. There are many different types of stock, and many different ways to diversify your stock holdings.

Growth stocks are usually characterized by corporate earnings that are increasing at a faster rate than their industry average or the overall market. Income stocks (for example, utilities or financial companies) generally offer higher dividend yields than market averages. Value stocks are typically characterized by selling at a low price relative to a company’s sales, earnings, or book value.

These are only some of the many ways in which stocks can be identified. With stocks, it’s especially important to diversify your holdings. That way, if one company is in trouble, it won’t have as much impact on your overall return as it would if it represented your entire retirement portfolio.

Types of Retirement Plan Investments: Bonds

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How do bonds work?

A bond is basically an IOU. Bonds, sometimes called fixed-income securities, are essentially loans to a corporation or governmental body. The borrower (the bond issuer) typically promises to pay the lender, or bondholder, regular interest payments until a certain date. At that point, the bond is said to have matured. When it reaches that maturity date, the full amount of the loan (the principal or face value) must be repaid.

A bond typically pays a stated interest rate called the coupon, a term that dates back to the days when a bondholder had to clip a coupon attached to the bond and mail it in to receive each interest payment. Most bonds pay interest on a fixed schedule, usually quarterly or semiannually, although some pay all interest at maturity along with the principal.

There are two fundamental ways that you can profit from owning bonds. The most obvious is the interest that bonds pay. However, you can also make money if you sell a bond for more than you paid for it. As with any security, bond prices move up and down in response to investor demand; they also are sensitive to changes in interest rates. A bond that is sold before its maturity date may be worth more or less than its face value, depending on how its interest rate compares to others.

The role of bonds in your retirement portfolio

One of the most important reasons that investors choose bonds is for their steady and predictable stream of income through interest payments. Bonds have traditionally been important for retirees for this reason. Also, though they are not risk-free–for example, a bond issuer could default on a payment or even fail to repay the principal–bonds are considered somewhat less risky than stocks. In part, that’s because a corporation must pay interest to bondholders before it pays dividends to its shareholders. Also, if it declares bankruptcy or dissolves, bondholders are first in line to be compensated.

The bond market often behaves very differently from stocks. For example, when stock prices are down, investors often prefer bonds because of their relative stability and interest payments. Also, when interest rates are high, bond returns can be attractive enough that investors decide not to assume the greater risk of stocks. Interest from bonds can help balance stock fluctuations and increase a portfolio’s stability. And because a bond’s face value gets repaid upon maturity, you can choose a bond that matures when you need the money.

Types of Retirement Plan Investments: Cash and Cash Alternatives

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Cash and cash alternatives

In daily life, cash is all around you, as currency, bank balances, negotiable money orders, and checks. However, in investing, “cash” is also used to refer to so-called cash alternatives: investments that are considered relatively low-risk and can generally be converted to cash quickly. Money market mutual funds and guaranteed investment contracts (GICs), government savings bonds, U.S. Treasury bills, and commercial paper are some examples of cash alternatives.

Using cash alternatives

Because of their conservative nature, cash alternatives involve the least risk. However, there is a tradeoff for their relative safety: their potential return is not as high as the return on investments that involve more risk. By focusing solely on playing it safe, you may limit your investment income, especially over longer time periods.

Cash alternatives can be useful in many ways. First, they can provide relative stability. While cash alternatives can’t assure you of a gain or protect you from losses, they are generally considered safer than other asset classes, such as stocks or bonds. Also, they can provide income on cash that would otherwise be idle. Readily available cash also can help you cope in a financial emergency. Finally, cash alternatives can serve as a temporary parking place when you’re not sure where to invest.

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IMPORTANT DISCLOSURES

Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, or legal advice. The information presented here is not specific to any individual’s personal circumstances.
To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax and legal professional based on his or her individual circumstances.
These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.

This communication is strictly intended for individuals residing in the state(s) of PA. No offers may be made or accepted from any resident outside the specific states referenced.

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2017.