Three things every investor should know

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Three things every investor should know

Learning the basics of investing can help you make smarter choices. Here are three concepts you need to understand:

1

Asset allocation

Your investment choices are divided into three asset classes — stock funds, bond funds and cash alternatives. Asset allocation means choosing from each to create a portfolio that matches your risk tolerance (conservative to aggressive) and time horizon (how long until you need the money).

Asset classes at a glance:

  • Stocks – They take some risk in return for potentially higher returns. Those who have plenty of time until retirement might consider a higher percentage of these funds.
  • Bonds – They can provide a good balance for an account made up mostly of stocks and may boost the earning potential of an account made up mostly of cash alternatives.
  • Cash alternatives – Generally, these are the most conservative options in a retirement plan. Consider a higher percentage of this asset class if you don't want to take much risk, don't need a high return or are closer to retirement.

2

Diversification

Consider selecting a variety of funds within each class. For example, some stock funds are designed to provide returns based on the financial performance of the companies that make up the fund. Others may have an objective to provide dividends as the main source of investment returns.

Mixing your investments among the different types of stock funds might help smooth out bumps in the market over the long term. This is diversification.

3

Rebalancing

Over time, your portfolio may become too conservative or aggressive because of market fluctuations. Rebalancing lets you bring your asset allocation back in line with your investment strategy.

See if your plan offers an automatic rebalancing option, which allows you to choose a rebalancing frequency and rebalances your account for you.

Understanding these principles and how they work together can help set you up for success.

Asset allocation, diversification and rebalancing do not ensure a profit and do not protect against loss in declining markets.

This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.