The Decision of How to Allocate • performance

The Decision of How to Allocate
• In other words, you control 92% of your investments’
performance
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* Determined by actions performed by the investment managers of the mutual funds.
DIVERSIFICATION using different types
of investments to build a portfolio
Stocks, Bonds and Cash
• Large and Small-Cap Stocks (U.S.)
• Non-U.S. Stocks
• Bonds (High Quality Bonds and Inflation-Linked Bonds)
• Cash (Money Market)
10% 10%
3%
7%
Large Company (U.S. Stocks)
30%
Small Company
30% (U.S. Stocks)
Non-U.S. Stocks
20%
High Quality Bonds
50%
Inflation-Linked Bonds
Money Market (Cash)
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Three Major ASSET CLASSES
• Cash
• Bonds or Fixed-Income Securities
• Stocks or Equities
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CTA Risk Management & Business Initiatives & Development Department
Three Major Asset Classes –
CASH
CASH: Guaranteed principal and interest,
including interest-bearing savings accounts,
money market accounts, Treasury bills, stable
value accounts
• Very liquid (easily converted to cash)
• Good for meeting short-term needs
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CTA Risk Management & Business Initiatives & Development Department
Three Major Asset Classes –
BONDS
BONDS or FIXED-INCOME SECURITIES: Loans to
the issuer with a promise to repay principal and
interest
• Issued by corporations, municipalities, states
and governments
• Quality of the bond varies (rating agencies
such as Moody’s and S&P)
• Duration or maturity (length of bond) varies
• Generally, income or interest rate is fixed or
set when bond is issued
• Sale value of bond is affected by a number of
factors including current interest rates
CTA Risk Management & Business Initiatives & Development Department
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Three Major Asset Classes –
STOCKS
STOCKS or EQUITIES: Represent partial ownership of a
company
• Shares of ownership purchased at their current value
• Investors profit when the value of a company
increases and shares are sold for more than their
purchase price
• No guarantee or promise to return principal, or
increase in value
• Can pay dividends
• Provides greater risk/return than fixed income
• Diversification within the investment options includes
• Large and small companies
• Domestic and international companies
• Style: growth vs. value
CTA Risk Management & Business Initiatives & Development Department
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Three Major Asset Classes and Inflation
20‐Year Performance through December 31, 2013
11.0% $8.02
Annualized average returns
9.2% $5.82
Small Stocks
Large Stocks
Bonds
Cash
Inflation
6.0% $3.24
3.0% $1.80
2.3% $1.57
$1
January 1993
September 2001
December 2013
Notes: 20-year historical performance of Small Stock (Russell 2000 Value), Large Stocks (S&P 500); Bonds (LB U.S.
Aggregate); Cash(90-day U.S. Treasury Bill); and, Inflation (Consumer Price Index). Past performance is not guaranteed
and is not Indicative of future results. Source: Morningstar Principia
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COMPOUNDING –
Even Small Amounts
Add Up Over Time
The chart shows the result if you invest $200 a
month in a tax-deferred retirement account
that earns a 6% annual return.*
Contributions
10 years $24,000
20 years $48,000
30 years $72,000
Earnings
$8,653
$43,129
$123,851
Total
$32,653
$91,129
$195,851
Return shown is for illustration only and does not represent the return of
any actual investment. Your results will vary. Taxes will be due upon
withdrawal. Distributions before age 59½ (age 55 upon separation from
service) may incur a 10% tax penalty (does not apply to 457 plans).
*
CTA Risk Management & Business Initiatives & Development Department
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Group Discussion
1. Were you surprised by the historical stock
market return chart?
2. How do you feel about investing?
3. How many of the people at your table would
be inclined to sell stocks after a big loss
versus waiting for a rebound?
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CTA Risk Management & Business Initiatives & Development Department
What is your time horizon to
RETIREMENT?
17% a.
17% b.
17% c.
17% d.
17% e.
17% f.
0-5 years
5-10 years
10-15 years
More than 15 years
I don’t know
This hurts my hair!
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Source: http://www.youtube.com/watch?v=LIuq9ticQ1o&feature=c4-overviewvl&list=PLxSeXKiuI25-SlkqJbaB3f-qRvr9Pu8RD
About TARGET-DATE Funds
• Mutual funds that automatically
adjust the asset allocation
based on your retirement date
• Target-date funds do not
guarantee that you will reach
your savings goals by the target
date
• The SEC is proposing new
disclosure for TDFs because
different companies offering
TDFs with the same target date
may have significantly different
asset allocations
CTA Risk Management & Business Initiatives & Development Department
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About TARGET-DATE Funds
Typical Target-Date Fund Allocations*
*Based on approximate allocations of BlackRock LifePath®
funds. Other target-date fund allocations may vary. Source:
BlueSpire Strategic Marketing/BlackRock Prospectus April
30, 2012 and Fact Sheets.
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TARGET-DATE Funds Are Popular
¾$4 billion in new assets flowed into target-date funds in
2012.*
¾From 2005 – 2011, TDFs grew from $71 billion to $378
billion.*
¾About 25% of plan participants use only a target-date
fund.*
¾TDFs are the most popular default options in plans that
offer them (47.2% of 403(b) and 69.7% of 401(k)
plans).**
Why are TDFs so popular?
¾Plan sponsors know that many participants may not have
the knowledge, time or interest to manage their own asset
allocation and rebalancing.
¾Plan participants like the ease and convenience of an allin-one solution.
*Source: Morningstar, www.morningstar.com
**Source: Plan Sponsor Council of America, www.psca.org.
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CONSIDERATIONS When
Choosing a Target-Date Fund
• Select a company with experience and stability of its
glide path
• Review performance
• Review the glide path
• Check fees
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CTA Risk Management & Business Initiatives & Development Department
Preparing Now for RETIREMENT
Choosing investments that will work for you
Created to help educators make good decisions about how to
invest their retirement savings and avoid common pitfalls.
• CTA Investment Allocation Models show different kinds of
investment mixes, such as stocks and bonds, depending on
how many years until retirement
• Models match to mutual funds available in most 403(b) plans
• Use the models as a guide when first getting a 403(b) or to
check current investments and make sure you are on the right
track.
• Developed by a professional investment firm for CTA members,
models were created using studies and long-term data about
performance of the stock, bond and cash markets
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CTA Investment ALLOCATION MODELS
Four simple solutions based on time horizon
until retirement:
¾ Early career, long-term growth, long time
until retirement
¾ Mid-career, balanced growth, beginning to
plan for retirement, but still a ways to go
¾ Near retirement, stability and moderate
growth, getting close to retirement
¾ Retirement, stability and income
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MODEL Portfolios
How do I know which is right for me?
• Everyone has different circumstances and there is no “one size fits all” solution, but the
chart can provide a guideline for your investment mix and how it changes over time.
• Early in your career, growth assets will comprise a majority of your investment mix.
• As you near retirement age, the model portfolios begin to become more and more
conservative.
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Portfolio Models
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Portfolio Models – INVESTOR PROFILES
Here you can see examples of how educators in different stages
of their careers match up with the profiles.
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