Choosing the Right Investments

Choosing just the right investments to reach your many goals, all with different time frames and all requiring significant amounts of money to achieve, can seem like a daunting task, especially since the factors influencing your investments and their success are constantly changing over time. Asset allocation - the process of dividing your money among different types of investments - has proven to be an effective strategy to successful investing.

Finding the right investment mix of stock, bond and money market funds can help assure that your portfolio provides the potential to meet all of your short-term and long-term financial goals throughout a lifetime of investing.

Asset allocation can also reduce the volatility of your portfolio and help manage your risk. That's because when you diversify your investments, your financial security isn't tied entirely to the ups and downs of just one investment. Periodic rebalancing of your portfolio will help ensure that you have enough cash on hand to meet short-term needs without disturbing your longer-term stock and bond investments.

The Risk/Reward Trade-Offs

No investment is completely risk-free. Each carries a certain amount of uncertainty. Even a decision not to invest means you risk falling behind the rate of inflation. Generally, the greater the risk, the greater the potential for reward over time. The trade-off between risk and reward is faced by every investor - beginner and experienced alike.

Time and how much money you have play an important role in the relative risk of different investments. As the chart illustrates, the longer you have to invest, the less impact market fluctuations will have on the value of your investments over time.

Source: (c)Computed using data from Stocks, Bonds, Bills, and Inflation 1997 Yearbook(tm), Ibbotson Associates, Chicago (annually updates work by Roger G. Ibbotson and Rex A. Sinquefield). Used with permission. All rights reserved.

Each bar shows the range of annual total returns for each asset class over one-year, five-year rolling and 20-year rolling periods from 1926-1996. Past performance is no guarantee of future results.

Asset Class Descriptions: Small Company Stocks represents 20% of the smallest capitalized stocks on the NYSE for 1926-1981 and the performance of the Dimensional Fund Advisors (DFA) Small Company Fund thereafter. Large Company Stocks represents the S&P 500® Composite Stock Price Index with dividends reinvested. (Both large and small company stocks will experience fluctuations in principal value and return.) Long-Term Corporate Bonds represents the Salomon Brothers Long-Term, High-Grade Corporate Bond Index total return. Long-Term Government Bonds is measured using a one-bond portfolio with a maturity of 20 years. Treasury Bills, representing short-term, fixed-rate investments guaranteed by the U.S. government, is measured by rolling over each month one bill which, at the beginning of the month, had a maturity of at least one month.

Investing for a Lifetime of Goals

Finding the right investment mix is based partly on your age, partly on your goals and partly on the type of investor you are. Since all these factors change over time, allocating your assets is a continuing process.

Are you prepared for an emergency?

Whatever your financial goals, you should always make sure you have a fund to cover emergencies. That's why financial experts recommend you set aside a portion of your assets in an investment option that seeks to preserve your capital.

Are you facing a large expenditure?

If you're saving for a large expense - such as a new home or college tuition - that is coming up in the next 4-10 years, you may want to place the money you have set aside in investments which offer a combination of growth and stability.

Are you thinking about retirement?

If you're saving for a long-term goal such as retirement, chances are it's going take money - and lots of it. That's why for long-term goals - 10 years or more away - you may want to consider allocating a portion of your savings to investments which offer the potential for higher growth over time.

What difference asset allocation can make

Asset allocation can make a real difference in portfolio performance. Consider how your assets would have grown over the past 20 years if you allocated a $100,000 portfolio three different ways.

These are hypothetical asset allocation models, provided as examples only. These models are based on historical performance and assume compound annual returns of 14.6% for stocks, 10.5% for bonds and 7.3% for cash, based on the actual compound annual returns of each asset class over the past 20 years as represented by Large Company Stocks, Long-Term Government Bonds and Treasury Bills, respectively. For asset class descriptions, please see the chart entitled "Reduction of Risk Over Time" on page 6. The performance shown does not represent past or future performance.

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