Once you know how a retirement plan works, the next step is deciding how to invest your money. You need to
find an investment strategy that will help you reach your retirement savings goals and satisfy your own level of comfort with investment risk. This page will help you understand three major types of investments:
equity securities,
fixed-income securities and
short-term debt and capital preservation. These three types of investing can have different risk and return characteristics as shown in the following graph.
This illustration compares the hypothetical growth of $10,000 invested in unmanaged indexes from Dec. 31 1983 to Dec. 31 2003. It is not possible to actually invest directly in unmanaged indexes; however this illustration does show how the performance of each type of investment has differed in the past. Keep in mind, the illustration does not include sales charges or ongoing expenses and is not indicative of past or future performance of any particular investment product.
Equity securities
Equity securities give you ownership in a company. Equity securities have historically had the highest gain over the long term, but their value can fluctuate quite a bit in the short term. Their potential for higher gains is matched with their potential for higher losses. Equity securities are generally considered growth investments and can include:
- Company stock (both U.S. stocks and international)
- Stock mutual fund (such as a growth, income or balanced fund)
Fixed-income securities
Generally, when you buy a fixed-income investment, you are loaning money to a government entity or corporation. In return, you receive set payments of interest over a specific period of time, and the return of your principal at the end of the period. Fixed-income securities provide a source of current income. They usually have lower rates of return than equity securities because they are expected to be less risky. Fixed-income investments are generally considered sources of moderate growth and income and can include:
- Government bond
- Corporate bond
- Bond mutual fund
Short-term debt and capital preservation
Because they offer the least risk, investors usually look to short-term debt and cash equivalent investments when they want to preserve their original investment or invest it for a time period of one year or less. These types of investments have limited maturities, which reduces the risk of selling them at a loss. Short-term investments are considered conservative investments and often have a lower rate of return than equity or fixed-income securities. Short-term investments include:
- Treasury bill (T-bill)
- Certificate of deposit (CD)
- Short-term bond mutual fund
- Money market (keep in mind these are not insured or guaranteed by FDIC or any other government agency)
Finding an investment strategy
A
risk tolerance questionnaire can help you determine which combination of the above investments best suit your current risk tolerance and goals.
Past performance is no guarantee of future results. All securities are subject to market risk, including loss of principal. Investment return and principal value will fluctuate and shares, when sold, may be worth more or less than their original cost.
