Investment Basics 2016 KNOW YOUR RETIREMENT PLANS
Investment Basics
2016
KNOW YOUR
RETIREMENT PLANS
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What is Investing?
• Investing is not a “get rich quick scheme”
• Investing is not “gambling”
• Investing is putting your money to work for you
Where are you investing your money?
• In Investment vehicles such as Stocks, bonds, mutual funds, real estate, cash
equivalent investments
• Each investment vehicle has a positive and a negative aspect to them
• Investing is becoming a necessity – you’ll need to save and invest over your
entire career to have financial security in retirement
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Investing Uncertainty
Finance and economics
• Not predictable sciences
• Professionals (economists, academics, analysts, fund managers,
individual investors) often have conflicting theories and ideas about
how/why the market works
» Theories are opinions; no right or wrong
• Your goal – to be an informed investor; match your investment mix with
your investment style
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Why Investing Works?
The magic of compounding – The Snowball Effect
Initial Investment
Year 1
Year 2
Year 3
$10,000
$10,600
$11,236
$11,910
invested @ 6%
+$600
+$636
+$674
• The process of generating earnings on
an asset’s invested earnings
• It requires re-investment of earnings and
time
invested @ 6%
invested @ 6%
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Dollar Cost Averaging
• Investing a fixed amount of money over a period of time
• If market goes up, investments cost more so buy less
• If market goes down, investments are a lower cost so buy more
• Investment appreciates over time
Contribution Investment
Amount Share Price Shares Purchased
1 $200 $50 4
2 $200 $40 5
3 $200 $20 10
4 $200 $40 5
Totals $800 $150 24
Average share price of the four contributions: $150 ÷ 4 = $37.50
Participant’s cost per share: $800 ÷ 24 = $33.33
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What is an Index?
An imaginary portfolio of securities representing a particular portion of that
market (i.e. Large US Stocks, Small US Stocks, Bonds, etc.)
Common Indexes
» S & P 500 – Combined stock value of 500 large US Companies
» Dow Jones Industrial Average – the price-weighted average of 30 US large company stocks
» NASDAQ – an index of more than 3,000 stocks that trade on the Nasdaq exchange, some of
whom are technology and biotech giants
» The Barclays Capital US Aggregate Bond Index – tracks performance of US investment grade
bonds
Why are Indexes important?
» They provide a baseline to measure the performance of your portfolio
» They provide information on how the “markets” are doing
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Index Funds vs Actively Managed Funds
Index Funds
» Portfolio constructed to match or track a market index; Invests in the same securities
as the Index it follows
» On track to perform as the Index performs
» Provides broad market exposure, low operating expenses and low portfolio turnover
Actively Managed Funds
» Utilizes a manager or team of managers to actively manage a fund’s portfolio
» Manager(s) rely on analytical research, forecasts and their own judgement and
experience in knowing what securities to buy, hold or sell.
» They try to outperform their related Index and are more expensive to operate; higher
expense ratios
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Diversification
• What is diversification?
» Managing risk by spreading your money among different types of
investments in your portfolio
• How does diversification help you?
» Reduces your overall investment risk
» Increases potential for consistent gains
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One Fundamental Principal
Diversify, Diversify, Diversify
• Among & Within Asset Classes
• Other Investment Styles
» Growth vs. Value
Stocks
• Large Cap
• Small Cap
• Mid Cap
• Foreign
Bonds
• Short Term
• Intermediate Term
Cash
• Money Market
• US Treasuries
• Stable Value
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Growth Stock Funds vs Value Stock Funds Two fundamental approaches with stock investing
Growth Stock Funds
» Growth investors seek companies that offer strong earnings growth
» Growth stock funds are:
Higher priced that broader market stocks
Higher earnings growth record
More volatile than broader market stocks
Value Stock Funds
» Value investors look for stocks that are either new and yet to be recognized by investors or have
fallen out of favor but have good fundamentals.
» Value stock funds are:
Lower priced than broader market stocks
Priced below similar companies in the same industry
Carry somewhat less risk than the broader market stocks
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Types of Investments Investments in the Plans
Cash Equivalents Cash Equivalent Funds
• Safest type
• Gains interest only
• Little to no risk
Mass Mutual SAGIC
Bonds Bond Funds:
• Called fixed income securities Dodge & Cox Income Fund
• Founded in debt; lending
money to a company or
government and they agree to
pay you interest on money lent
and eventually pay you back
the entire amount
BlackRock Inflation Protected Bond
Fund
• Provide safety and stability –
lower risk, lower potential
returns; slower growth
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Types of Investments Investments in the Plans
Stocks Large US Stock Funds:
• Become part owner of the company entitles you to receive profits (dividends)
• Volatile – price fluctuates in value on a daily basis
• High potential return – must accept risk associated with owning stock
Dodge & Cox Stock
Vanguard 500 Index
Delaware US Growth Instl
Mid-Cap US Stock Funds: Vanguard Mid Cap Index Adm
BlackRock US Opportunities Instl
Small US Stock Funds: Vanguard Strategic Small Cap Equity
Inv
Foreign Large Stock Funds: Ivy International Core Equity I
Brandes International Equity I
Oppenheimer International Growth I
World Allocation Funds: First Eagle Global I
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Types of Investments Investments in the AIP
Real Estate Real Estate Funds:
• Real Estate Investment Trust (REIT)
• A fund that invests in real estate through property or mortgages
• Funds trade on major exchanges like stock funds
• Considered similar to stock funds
• Provides investors with diversification, regular income streams and long-term capital appreciation
Nuveen Real Estate Securities I
Global Real Estate Funds: Voya Global Real Estate I
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Asset Class Winners and Losers
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• Age
• Current Income
• Financial Status
• Personality
• Personal Circumstances
General Rule
• The shorter your time horizon, the more conservative you should be
• With a longer time horizon, the more aggressive you should be
Know Yourself
Investment Influences
Risk
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Take the Investor Profile Quiz
• 10 easy questions
• Determines the type of investor you are currently
• Suggests an investment strategy, called a Model Portfolio, which follows your
profile and is appropriate for you
• Offered online, by phone with a Benefit Services Rep, or in Enrollment Booklet
» Analyzes your feelings about putting your money into higher risk investments vs lower
risk investments
High risk investments are typically stocks or stock mutual funds. Over the long term
they have shown to provide growth on your money.
Bonds and cash are the lower risk investments. They provide stability but slower
growth.
» Assists you in evaluating what percentage to put in higher risk (growth) investments
and in lower risk (slow growing) investments
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Investment Balance between Safety and Risk
What is the best balance for you today? Tomorrow?
Cash (Equivalent) & Bonds
Risk Safety
Balance risk with several types of investments (Stocks & Bonds)
Stocks (Large, Small,
Mid, Foreign)
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Create Your Portfolio
Types of…
• Stock Mutual Funds
» Ownership in companies
» Large, mid, small-cap, foreign
» Value, blend & growth
» Values fluctuate
» Higher risk but provides growth over time
• Bond Mutual Funds
» Obligations of corporations & governments
» Pay regular interest payments
» Stable; slower growth; lower risk
• Capital Preservation Mutual Funds
» Money markets, CDs, T-Bills
» Short term
Highest return Lowest return
Highest return Lowest return
Highest return Lowest return
Risk-o-Meter
Stocks
Bonds
Capital
Preservation
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Investment options to create your own portfolio
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Vanguard Target Date Retirement Funds
• One investment choice made up of several Vanguard index mutual
funds
» Very diversified portfolios for each Target year
• Professionally managed by Vanguard
• You choose by the year you want to retire (range of years)
• Portfolio automatically adjusts from aggressive (stocks funds) to more
conservative (bonds and cash equivalents) as you get closer to
retirement year(s)
» Reducing risk automatically over time
• Appropriate to put 100% of your money in a Target fund
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Vanguard Target Date Retirement Funds
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How do Vanguard Target Date Funds rate?
• One of the top 5 in an industry study of Target Date Funds
• Provides good returns and diversified investment mix over time
• Low expenses are a hallmark for Vanguard; therefore higher returns for
investors less for fund management fees.
*Kiplinger Fund Watch. “Best Target-Date Funds for Retirement Savers” by
Nellie S. Huang 2015
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Monitor your portfolio annually
• How has your portfolio performed?
• Are you ok with the amount/percentage in high risk investments or low risk
investments?
» If not, make changes over time – move money from high risk to low risk investments
• Remember, you can’t time the market! No one can predict when investments
will go up or down.
Keep with your strategy until you don’t feel comfortable with it.
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Monitor your portfolio annually
• Remember, saving for retirement is over a long time - stocks historically
provide growth of money over the long term.
• Educate yourself on investing
» Use millimanbenefits.com
» Read financial magazines
» Search the internet
• Review your investments
» Use millimanbenefits.com to research investments in your SRP and Deferred Comp
Plan
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Additional Resources
• www.millimanbenefits.com
» Benefits Services Hotline 1.866.767.1212
• www.money.cnn.com
• www.bloomberg.com
• www.aaii.com (American Association of Individual Investors (AAII)
» Phone Number: 1.800.428.2244
• www.forbes.com – Forbes is a biweekly newspaper focusing on business & investing
• www.ici.org – Learn about mutual fund investing
• www.fundalarm.com – tools & commentary on mutual funds
• www.morningstar.com – Morningstar analyzes & rates investments (direct link on Milliman website)
• Barron’s – a weekly newspaper that reviews the stock market
• The Wall Street Journal – newspaper focusing on business & investing
Questions?
Thank You!