Choosing the right mix of investments is the key to building a successful retirement savings plan. First, spread your investments across stocks, bonds, and money market instruments. Then, look for variety within these three asset types, especially stocks. By mixing it up, you can help ensure that you are always enjoying growth in at least one type of investment you selected. Growth in one investment may offset a drop in another.
What's the Difference in the Three Asset Types?
Stocks may vary in price significantly from day to day. They also vary in the amount of income they provide to investors and whether they provide income at all. Historically, stocks and funds that hold stocks have earned much higher returns than bonds and money market instruments. These higher returns have allowed stocks and funds that hold stocks to stay ahead of inflation by a wide margin in the past.
Bonds have historically shown less variation in price than stocks, and usually pay regular income to investors in the form of interest. This interest income can help offset some of the price fluctuations of stocks in your portfolio.
Money market instruments generally show the least variation in price. This is advantageous in stock market downturns, but investors sacrifice growth potential when the stock market is rising.
Stocks—Two Types and Three Sizes Stocks offer lots of opportunity to mix types and sizes to suit your investment style. You can select from growth or value stocks. You should consider including both growth and value stocks in your mix of investments because each type tends to lead the stock market in different market cycles.
Growth stocks are viewed as having above-average earnings potential because of their past earnings and competitiveness in their industries.
Value stocks are considered to be bargains or under-priced because of fundamental strengths that are expected to increase their prices.
The size of a stock refers to the total value of the company's issued and outstanding shares of stock. The size of a stock is called market capitalization or market cap for short. You can invest in large cap, mid cap, and small cap stocks or funds that hold stocks.
Stocks that have a large size or market cap are usually large, well-known companies, such as Time Warner Inc., that have a value over $10 billion.
Stocks that have a small size or market cap may be lesser known companies that serve a need that is not visible to the typical consumer. Small cap stocks are typically valued at under $2.5 billion.
Each investment type and size may offer growth potential at one time or another during a long-term investment plan for retirement.
The information contained in this Web site is for educational purposes only and does not constitute investment, financial, tax or legal advice. Further, this information is general in nature and is not intended to be reflective of any specific plan. Please contact your personal investment, financial, tax or legal advisor regarding your specific needs and situation. Further, please refer to your plan documents for more information about the specifics of your plan.
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