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Choosing Investments for Your 401(k)
- 1. Choosing Investments for Your 401(k) CRC780983 December 2013 Expires: January 2015 © 2014 Morgan Stanley Smith Barney LLC. Member SIPC. Allen R. Patin, Jr. Financial Advisor Wealth Management June 2014
- 2. 2 Why Are We Here Today? Describe the primary asset classes Review the risks associated with the primary asset classes Define what a mutual fund is Describe the types of mutual funds Identify benefits and considerations associated with investing in mutual funds Describe factors you should consider when selecting investments for your 401(k)
- 3. 3 Primary Asset Classes Cash and cash equivalents Fixed income securities (bonds) Equities (stocks)
- 4. 4 Cash and Cash Equivalents Provide a stabilizing force to the overall portfolio Generate a small level of income Serve as a source of available capital should the portfolio need to be rebalanced
- 5. 5 Fixed Income Securities (Bonds) Provide a long-term base of cash flow Provide a hedge against the more volatile returns often found in the stock market May provide long-term and short-term gains or losses resulting from changing interest rates
- 6. 6 Equities (Stocks) Provide the opportunity for long-term growth through capital appreciation Offer higher long-term returns, which provide a hedge against inflation Generate income through dividends
- 7. 7 Risks Currency Risk Credit Risk Business Cycle Risk Business Risk Political and Legislative Risk Interest Rate Risk Purchasing Power Risk Market Risk Fixed Income EquityCash
- 8. 8 Risk and Return The amount of risk associated with an investment is usually evaluated by comparing it to the “risk-free rate of return” Risk-free rate of return is: a measurement of the highest possible return available with no assumed risk commonly represented by the current yield on the 30-Day U.S. Treasury Bill, generally considered to involve minimal risk As an investor, you want to choose investments with the highest possible return while taking on the least amount of risk Properly balancing risk and return when selecting investments is imperative
- 9. 9 Mutual Funds Type of investment company Investors pool money Portfolio of securities such as stocks and bonds Managed by a professional portfolio manager
- 10. 10 Mutual Fund Prospectus Investment objective and strategy Sales charges Fees and expenses Risks Performance information Investors should carefully consider the investment objectives and risks as well as charges and expenses of a mutual fund before investing. To obtain a prospectus, contact your Financial Advisor or visit the fund company’s website. The prospectus contains this and other information about the mutual fund. Read the prospectus carefully before investing.
- 11. 11 Types of Mutual Funds Money market funds Fixed income funds Equity funds Hybrid funds
- 12. 12 Money Market Funds Regular income Stable share price Liquid Low risk/return potential An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the fund.
- 13. 13 Categories of Money Market Funds U.S. Treasury U.S. Government Tax-Exempt General
- 14. 14 Bond Mutual Funds Regular income Moderate volatility Long-term investment Moderate risk/return potential
- 15. 15 Categories of Bond Mutual Funds U.S. Government and U.S. Government Agency Municipal or Tax-Exempt Corporate International Diversified
- 16. 16 Equity Mutual Funds Capital appreciation Income potential Long-term investment High risk/return potential Inflation hedge
- 17. 17 Categories of Equity Mutual Funds Geographic location Investment style Market capitalization
- 18. 18 Geographic Location Domestic or U.S. equity Global equity International equity Emerging market Regional equity
- 19. 19 Investment Style Value Growth Income Sector Index
- 20. 20 Market Capitalization Small-cap stocks – Market capitalization of less than $1 billion Mid-cap stocks – Market capitalization between $1 billion and $5 billion Large-cap stocks – Market capitalization greater than $5 billion Mid-Cap StocksSmall-Cap Stocks Market Capitalization ($ billions) Large-Cap Stocks 50 1 +
- 21. 21 Hybrid Funds Asset-allocated portfolio Simplicity Suitable for various time horizons Potential tax efficiency Fixed Income 40% Cash 5% Equities 55%
- 22. 22 Categories of Hybrid Funds Target date funds Balanced funds Flexible portfolio funds Funds of funds
- 23. 23 Potential Risk/Return Comparison Risk Return Money Market Fund Short-Term Bond Fund Municipal Bond Fund Intermediate-Term Government Bond Fund Long-Term Corporate Bond Fund Balanced Fund Growth & Income Fund Equity-Income Fund International Equity Fund Small-Cap Stock Fund Aggressive Growth Fund Emerging Markets Fund
- 24. 24 Benefits Professional management Diversification Liquidity Low minimum investment requirements Convenience
- 25. 25 Considerations Costs Lack of transparency Style drift Taxes
- 26. 26 Selecting the Right Investments Risk tolerance Investment objective Time horizon Asset allocation
- 27. 27 Your Financial Advisor Team at Morgan Stanley Our Financial Advisors can provide Access to intellectual strength and global resources of Morgan Stanley Financial solutions that address your specific needs and goals Name Allen R. Patin, Jr. Tax laws are complex and subject to change. Morgan Stanley Smith Barney LLC (“Morgan Stanley”), its affiliates and Morgan Stanley Financial Advisors and Private Wealth Advisors do not provide tax or legal advice and are not “fiduciaries” (under ERISA, the Internal Revenue Code or otherwise) with respect to the services or activities described herein except as otherwise provided in a written agreement with Morgan Stanley. This material was not intended or written to be used for the purpose of avoiding tax penalties that may be imposed on the taxpayer. Individuals are encouraged to consult their tax and legal advisors (a) before establishing a retirement plan or account, and (b) regarding any potential tax, ERISA and related consequences of any investments made under such plan or account. Financial Advisor 615-292-0303 Allen.R.Patin@morganstanley.com
Hinweis der Redaktion
- Option 1: State: Welcome to the Morgan Stanley Choosing Investments for Your 401(k) seminar. I am pleased that you took time out of your busy day to attend this seminar. My name is __________. I am a Financial Advisor with Morgan Stanley. Your company has invited me to provide a seminar designed to help you make more informed decisions with respect to your 401(k) plan Option 2: State: Welcome to the Morgan Stanley Choosing Investments for Your 401(k) seminar. I am pleased that you took time out of your busy day to attend this seminar. My name is __________. I am a Financial Advisor with Morgan Stanley. Go to next slide
- State: As companies have shifted more of the burden for saving and investing for retirement to individuals, it is increasingly important that individuals better understand their 401(k)s and the investments available to them. This seminar will provide an overview of the types of investments available in your 401(k) and the factors you should consider when choosing investments. Among other things, we will: Describe the primary asset classes Review the risks associated with the primary asset classes Define what a mutual fund is Describe the types of mutual funds Identify benefits and considerations associated with investing in mutual funds Describe factors you should consider when selecting investments for your 401(k) Go to next slide
- State: Investments are generally categorized by their asset class. While there are numerous asset classes, we will focus on the primary three: Cash or cash equivalents, such as U.S. Treasury bills, certificates of deposit, and money market mutual funds Fixed income securities, such as government, corporate, and municipal bonds, or bond mutual funds Equities, including the stock of individual companies and mutual funds that invest in stocks Other asset classes include real estate and commodities. Go to next slide
- State: Cash and cash equivalents are designed to meet the liquidity needs of investors while offering interest income and stability of principal. Because of the short maturities of these investments, price fluctuations are typically limited. Click to reveal bullets State: As part of an investor’s portfolio, cash and cash equivalents serve the following functions: Provide a stabilizing force to the overall portfolio Generate a small level of income Serve as a source of available capital should an asset-allocated portfolio need to be rebalanced Go to next slide
- State: Fixed income securities, or bonds, are securities representing the debt of corporations, governments, or municipalities. Bonds generally provide investors with income and a return of capital if held to maturity. The coupon, or interest paid on the bond, is usually fixed at issue. Click to reveal bullets State: As part of an investor’s portfolio, fixed income securities can serve the following functions: Provide a long-term base of cash flow Provide a hedge against the more volatile returns often found in the stock market Offer potential for long-term and short-term gains (or losses) resulting from changes in interest rates in the overall market Go to next slide
- State: The third primary asset class is equities. Equities are securities that represent ownership in a corporation. As an asset class, equities have historically generated the highest long-term average returns for investors. Since equities derive much of their return in the form of capital appreciation, they typically form the basis for growth in an investment portfolio. Equities, however, require a higher risk tolerance as they are prone to greater price fluctuations. Click to reveal bullets State: As part of an investor’s portfolio, equities can serve the following function: Provide the opportunity for long-term growth through capital appreciation Offer higher long-term returns, which provide a hedge against inflation Generate income through dividends Go to next slide
- State: In addition to the functions that the asset classes serve in a portfolio, such as liquidity, income, and growth, they also introduce risk or the potential for loss on an investment. There is generally a fundamental trade-off between risk and return—the higher the risk, the higher the expected potential for return. For this reason, it is important to make a correct assessment of the risks involved in an asset class or a particular security when comparing returns among different investments. The risks associated with investing in the three primary asset classes include: Click to reveal each risk Market risk – The risk of a decrease in a security’s market value due to an overall decline in the market. All of the primary asset classes are subject to market risk. Business risk – The risk of a decrease in a security’s market value as a result of the challenges of doing business in a particular industry or environment. All of the primary asset classes are subject to business risk. Business cycle risk – The risk that a company’s business and, therefore, its revenue and earnings are tied to economic activity or market trends. Fixed income and equities are subject to business cycle risk. Credit risk – The risk that a company may default on its promise to pay creditors and to make interest and principal payments to bondholders. All of the primary asset classes are subject to credit risk. Currency risk – The risk that a fluctuation in exchange rates between currencies will negatively affect the return on any foreign securities an investor owns. All of the primary asset classes are subject to currency risk. Interest rate risk – The risk that the value of a security will change due to fluctuating interest rates in the market. All of the primary asset classes are subject to interest rate risk. Political and legislative risk – The risk that a security’s value may be affected due to political and legislative changes that affect ownership rights or the business environment. All of the primary asset classes are subject to political and legislative risk. Purchasing power risk – Also known as inflation risk, it is the risk that an investment’s return will not keep pace with inflation. Cash and cash equivalents and fixed income are subject to purchasing power risk. Go to next slide
- State: The amount of risk associated with an investment is usually evaluated by comparing it to the “risk-free rate of return.” This is simply a measurement of the highest possible return available with no assumed risk. The risk-free rate of return is commonly represented by the current yield on the 30-Day U.S. Treasury Bill, which is generally considered to involve minimal risk. State: As an investor, you want to choose investments with the highest possible return, while taking on the least amount of risk. As such, it is important to properly balance risk and return when selecting investments. Go to next slide
- State: While there are numerous ways to invest in the primary asset classes, the method for doing so in a 401(k) is typically through mutual funds. A mutual fund is a type of investment company that operates by pooling the money from many investors and investing it in securities such as stocks and bonds. The investment portfolio is managed by a professional portfolio manager in accordance with the fund’s investment objective and policies. Investors in a mutual fund pool their money with that of other investors and in return receive shares that represent partial ownership of the securities held in the fund’s portfolio. This portfolio consists of a diversified pool of securities selected by the fund’s manager. Investing in a mutual fund allows an investor to gain a level of diversification that he or she would likely not be able to obtain on his or her own. Go to next slide
- State: When selecting among the mutual funds available to you, you should always read the fund’s prospectus which describes its specific characteristics, features, and the manner in which the fund operates. All mutual funds must issue a prospectus in order to provide investors with the information necessary to make an informed decision regarding investment in the fund. The information contained within the prospectus may vary based on the type of fund but it must include the following: Investment objective and strategy Sales charges Fees and expenses Risks Performance information Go to next slide
- State: Your 401(k) offers numerous types of mutual funds that you can select for your portfolio. The different fund types provide access to a wide range of investment objectives that are appropriate for a variety of risk tolerances. Mutual funds are primarily classified according to the types of securities in which they invest. Click to reveal each type of fund Money market funds – A money market mutual fund invests in short-term debt instruments or cash equivalents. The average maturity of the securities in the portfolio usually ranges from 30 to 90 days, with most money market funds having average maturities of 60 days or less. Fixed income funds – A fixed income mutual fund, often referred to as a bond fund, may invest in one specific type of fixed income security or a broad array of fixed income securities, with maturities ranging from 1 to 30 years. In addition, bond funds may include short-term securities similar to those found in a money market mutual fund. Equity funds – An equity, or stock, mutual fund invests in the common stock of individual companies. There are numerous types of equity funds that differ based on the investment style that they employ and the types of companies and securities in which they invest. Hybrid funds – A hybrid fund has characteristics of the other three types of mutual funds. The portfolio of a hybrid fund is generally comprised of a combination of equity, fixed income, and short-term debt or money market instruments. State: Let’s look at each of these in more detail. Go to next slide
- State: Money market mutual funds invest in short-term debt instruments, such as CDs, banker’s acceptances, commercial paper, repurchase agreements, U.S. Treasury bills, Eurodollar CDs, and short-term U.S. government agency issues. The average maturity of the securities in their portfolios usually ranges from 30 to 90 days, with most money market funds having average maturities of 60 days or less. The investment objective of money market mutual funds is to provide a modest level of current income while preserving the principal invested in the fund. Although there is no guarantee, the portfolios of money market funds are managed to maintain a constant share price of $1.00. As such, money market funds can be appropriate for investors seeking stability and liquidity. Money market funds are generally considered to have less risk than the other types of mutual funds. Click to reveal each bullet as you discuss State: The following are some of the common features of money market mutual funds: Regular income – Most money market funds provide regular income in the form of monthly dividends. In the case of funds that invest in short-term municipal securities, dividends are free from federal and, in certain instances, state and local taxes. Stable share price – Although not guaranteed, money market funds are managed to maintain a constant share price of $1.00. Liquid – Investors can easily access the money invested in money market funds without concerns about losing principal. In fact, many money market funds offer checkwriting privileges making it even more convenient for investors to draw money from these funds. Low risk/return potential – Money market funds typically have less risk than other types of mutual funds. However, money market mutual funds also have less return potential. Go to next slide
- State: Money market funds are typically categorized according to the types of short-term fixed income securities in which they invest. The following are the categories of money market funds listed in the order of their typical risk and return potential, from lowest to highest. Click to reveal each category as you discuss U.S. Treasury – Funds that invest in short-term U.S. Treasuries, typically Treasury bills. These funds have the highest credit quality and income is normally exempt from state and local taxes. U.S. Government – Funds that invest in short-term U.S. Treasury and/or government agency securities. A portion of the income may be exempt from state and local taxes. Tax-Exempt – Also known as municipal money market funds, these funds invest in short-term municipal securities. Income is exempt from federal and, in some cases, state and local taxes. General – Funds that have few restrictions on the types of securities in which they can invest. Their portfolios include short-term corporate debt in addition to U.S. Treasuries and government agencies. These funds generally offer the highest return of money market funds. Go to next slide
- State: Bond funds may invest in one specific type of fixed income security or a broad array of fixed income securities, such as U.S. Treasury notes and bonds, government agency bonds, municipal bonds, corporate bonds, and international bonds. The objective of most fixed income mutual funds is to provide current income. Investors receive income in the form of dividends on their fund shares, which are distributions of the interest earned on the bonds in the portfolio. Funds may also distribute capital gains from the sale of appreciated securities. Fixed income funds are considered more aggressive than money market funds, but usually less aggressive than equity funds. There are instances, however, when the risk in fixed income funds is higher than that in equity funds. Unlike a money market fund, the share price of a fixed income fund changes daily to reflect the valuation of the underlying securities in its portfolio. Fixed income funds can have varying degrees of risk based on the credit quality and maturities of the securities within their portfolios. As a result, fixed income funds can be appropriate for investors across a range of risk tolerances and time horizons. Click to reveal bullets as you discuss The following are some of the common features of fixed income mutual funds: Regular income – Most fixed income funds pay monthly or quarterly dividends. Fixed income funds generally offer higher income than that offered by money market funds or bank savings accounts. In the case of funds that invest in municipal securities, dividends are free from federal and, in certain instances, state and local taxes. Moderate volatility – The share prices of fixed income funds are vulnerable to fluctuations in share price due to changes in market conditions or the credit quality of issuers. Long-term investment – Fixed income funds are generally only appropriate for investors with a long-term time horizon. However, funds that invest in bonds with shorter maturities generally experience less volatility and therefore may be appropriate for investors with more conservative risk tolerances and shorter-term time horizons. Moderate risk/return potential – Fixed income funds typically have a moderate risk/return potential that falls between those of money market funds and equity funds. However, some fixed income funds, such as high yield bond funds or funds that invest in emerging markets debt, may have more risk than some equity funds. Go to next slide
- Click to reveal each category as you discuss State: Bond funds are typically categorized by the types of bonds they hold in their portfolios. In order to achieve greater diversification, investors may purchase more than one type of fund. Bond funds can generally be classified into the following general categories: U.S. Government and U.S. Government Agency – U.S. Government and U.S. Government Agency Funds invest in U.S. Treasuries, government agency bonds, collateralized mortgage obligations, and zero coupon bonds. U.S. Treasuries are backed by the full faith and credit of the U.S. government. Agency bonds are backed by the credit of the agency issuing the bonds. These funds are usually considered the most conservative types of fixed income funds due to the high credit quality of the securities in their portfolios. Municipal or Tax-Exempt – Municipal or Tax-Exempt Funds invest in bonds issued by state and local governments and their agencies, including port authorities and housing and development agencies. Municipal bonds may be backed by the general taxing powers of the issuer or can be secured by the revenues from specific projects (such as toll roads). The dividends paid by a municipal bond fund are generally exempt from federal and, in some cases, state and local income taxes. Because 401(k)s already provide tax-deferral, municipal bond funds are generally not appropriate investments for a 401(k). Corporate – Corporate Bond Funds invest in fixed income securities issued by corporations. Corporate bond funds are generally classified according to the credit rating of their holdings as high quality, investment grade, or high yield. International – International Bond Funds invest in bonds issued by foreign governments and their agencies, companies with headquarters outside of the U.S., and supranational entities or international organizations formed by two or more governments. The bonds in these portfolios can also expose investors to currency risk and political and economic instability abroad. Diversified – Diversified Bond Funds invest in a combination of bonds issued by the U.S. government, government agencies, U.S. corporations, foreign governments, and companies located outside the U.S. These funds will often carry the title of Strategic Fixed Income Funds and allow investors to diversify across multiple sectors within one fund. Because these funds also contain bonds denominated in foreign currencies (non-dollar bonds), they are subject to currency risk. In addition to the types of bonds that a fund holds, the risk and return potential of a fund is affected by the average maturity of the portfolio and the credit quality of the bonds in its portfolio. Funds investing in bonds with longer maturities and/or lower credit quality will generally have higher potential returns and greater risk than funds that invest in bonds with shorter maturities or higher credit quality. Go to next slide
- State: An equity, or stock, mutual fund invests in the common stock of individual companies. There are various types of equity funds that differ based on the investment style that they employ and the types of companies and securities in which they invest. The investment objective of most equity mutual funds is growth or capital appreciation—increasing the value of the fund’s portfolio through appreciation in the market value of the individual stocks in the portfolio. The return on an equity mutual fund is typically comprised of an increase (or decrease) in the value of the fund as well as dividends distributed by the companies in the portfolio. Some equity mutual funds seek to balance the return they provide between growth and income from dividends. Equity mutual funds generally have more risk than other types of mutual funds, but have the potential for higher returns. They offer long-term growth potential and a hedge against inflation. Like fixed income funds, equity mutual funds have varying degrees of risk based on the types of equities purchased for the portfolio and the investment strategy employed. However, all equity funds carry some risk and are only appropriate for investors who can accept the risk and have long-term time horizons. Click to reveal each bullet as you discuss The following are some of the common features of equity mutual funds: Capital appreciation – Equity funds provide investors with long-term growth and capital appreciation of their investment. Income potential – Equity funds may generate income from dividend distributions. Some funds may have income as part of their investment objectives. Long-term investment – Equity funds are only appropriate for investors with long-term time horizons. High risk/return potential – Compared to the other types of mutual funds, equity funds generally have the highest risk/return potential. Inflation hedge – Equity funds generally provide returns that allow investors’ portfolios to outpace inflation over the long term and maintain their purchasing power. Go to next slide
- State: Equity mutual funds differ based on the investment style that they employ, and the geographic location and types of companies in which they invest. In order to achieve greater diversification, investors may purchase more than one type of fund. Equity mutual funds are typically categorized according to the following general criteria: Geographic location Investment style Market capitalization We will discuss each of these categories on the following slides. Go to next slide
- State: Stock market fundamentals and general economic conditions can vary greatly depending on country or geographic region. As a result, where companies are headquartered and the regions in which they conduct business can have a significant impact on the performance of their stocks. For example, when stocks in the U.S. are performing poorly due to a market correction or economic recession, stock markets in Asia may be advancing because of the strong local economies. In order to protect against the poor performance of one region, it is generally recommended that investors own equity funds which invest in several different geographic regions. Click to reveal each bullet as you discuss Equity mutual fund classifications according to geographic location include: Domestic or U.S. equity – Funds that maintain the large majority of their holdings in the stock of companies headquartered in the U.S. These funds may permit a small percentage of their holdings in bonds and/or foreign stocks, which must be disclosed in the prospectus. Global equity – Funds that invest in equity securities traded worldwide, including those of U.S. companies. International equity – Funds that invest primarily in the stock of companies located outside the U.S. Emerging market – Funds that invest primarily in the stock of companies based in developing regions of the world. Regional equity – Funds that invest in the stock of companies based in a specific region of the world. Go to next slide
- State: In addition to choosing stocks based on their geographic location, funds also use different investment styles for analyzing and selecting individual stocks to be held in their portfolios. A fund’s investment style can affect both the performance of the fund and its risk profile. Click to reveal each bullet as you discuss Mutual funds will generally choose one of the following investment styles to select securities for their portfolios: Value – Value funds generally invest in stocks whose valuations are below that of their industry peers or are undervalued compared to the overall market. Growth – Growth funds invest in the stocks of companies whose anticipated growth rates are higher than those of their industry peers. In selecting stocks, the portfolio manager seeks to identify those companies that are best positioned to take advantage of economic trends and business conditions. These companies generally do not pay dividends (or pay only small dividends), but instead seek to reward shareholders in terms of increased share prices. Income – Income-producing equity funds, often referred to as equity income funds, seek to provide shareholders with current income in addition to capital appreciation. These funds generally invest in companies that have a history of paying dividends to their shareholders. Sector – Sector funds channel their investment portfolios into equities within a single industry or sector, such as technology, real estate, or financial services. While there is diversification among companies, there is little diversification between industries to compensate for down market cycles in a sector. As a result, sector funds generally involve more risk and have a higher return potential than diversified equity funds. Index – Index funds seek to track the performance of a market index by replicating as closely as possible its composition. Index funds require little research or trading activity and the funds typically invest without input from a portfolio manager. An index fund is usually fully invested in the securities of the index it mirrors and only makes adjustments when the index is modified. Go to next slide
- State: Equity mutual funds often focus their investments in companies of a certain size or market capitalization. Market capitalization is calculated by multiplying the current share price of a stock by the number of shares outstanding. The general classifications of equity funds based on the market capitalization of the companies in which the funds invest are: Small-cap stocks – Market capitalization of less than $1 billion Mid-cap stocks – Market capitalization between $1 billion and $5 billion Large-cap stocks – Market capitalization greater than $5 billion Generally, large capitalization companies are established companies with a significant share of a market segment and are considered low to moderate risk. Conversely, small capitalization companies are often new companies with little or no revenues and therefore considered higher risk. Because of their smaller size, small capitalization companies typically have the potential for greater growth and potentially higher returns than large capitalization companies. However, their lack of an established business can subject them to more risk. Go to next slide
- State: Hybrid funds invest in a combination of equity, fixed income, and short-term debt or money market instruments. The funds are designed to provide additional convenience and diversification to investors by offering the advantages of multiple types of securities in one fund. Most hybrid funds have the dual investment objective of providing long-term growth and income. Growth is provided by the equities in the portfolio while income is provided by the bonds and cash equivalents. By blending the objectives and features of money market, fixed income, and equity funds, hybrid funds have the potential to provide a competitive return to investors with reduced volatility. Click to reveal each bullet as you discuss State: Because of their design, hybrid funds generally have similar features to fixed income and equity mutual funds. Some of the common features of hybrid funds include: Asset-allocated portfolio – Hybrid funds provide investors with a portfolio allocated among the three primary asset classes. Hybrid funds offer the benefits of an asset-allocated portfolio designed to reduce volatility and optimize return in a single fund. Simplicity – Hybrid fund managers determine and implement portfolio asset allocation for investors. Suitable for various time horizons – Because the mix of asset classes within hybrid funds varies, hybrid funds can be appropriate for investors with short- to long-term time horizons. Potential tax efficiency – Hybrid fund managers can use inflows of new money to rebalance their portfolios instead of selling overweighted asset classes and realizing capital gains. Go to next slide
- State: Hybrid funds are typically categorized by the way their portfolios are managed. Click to reveal each bullet as you discuss The following are the most common types of hybrid funds: Target date funds invest in a combination of equities, bonds, and cash equivalents and are usually designed around a specific time horizon (to match a specific financial goal) or risk tolerance. The risk and return varies according to the portfolio holdings. Balanced funds invest in a combination of equities and bonds. The mix of bonds and equities is adjusted to reflect an asset allocation strategy appropriate to market conditions and the performance of the individual asset classes. Typically, the allocation ranges from 40% to 60% in stocks or bonds and is defined in the prospectus. Flexible portfolio funds also invest in a mix of stocks and bonds. However, the portfolio manager is not limited to specific asset class percentages and can invest more aggressively in one asset class. Funds of funds hold shares of other mutual funds. The asset allocation component is provided by mutual funds that invest in stocks, bonds, or cash equivalents. Further diversification is provided by investing in more than one fund with the same investment objective. Go to next slide
- State: The risk associated with a particular fund is directly related to its potential return. In general, funds that offer the potential for higher returns have more risk associated with them. The higher potential return is the benefit investors receive for taking on additional risk. The chart displays various types of funds and what is considered their typical risk/return potential. For example, growth funds have the potential for higher returns, but they also have more risk associated with the companies in which they invest. In order to provide the higher returns, the companies must grow as expected. Bond funds, on the other hand, usually provide lower returns. However, they are considered to have low to moderate risk because of the more stable nature of bonds and the income that they provide. Go to next slide
- Click to reveal each bullet as you discuss State: As the primary investment option available to investors in a 401(k), mutual funds offer a variety of benefits, including: Professional management – Mutual funds are managed by highly trained portfolio managers who dedicate their full attention and analytical skills to keeping abreast of market trends and company performance. These professional money managers have instant access to the vast amounts of information necessary to effectively implement their investment strategies. For investors who do not have the time or the knowledge of the markets, mutual funds provide access to the expertise of these managers. Diversification – Diversification is the process of spreading one’s investments across many different securities. Diversification reduces overall portfolio risk by limiting an investor’s exposure to any one security or type of security. Investing in mutual funds is one of the easiest ways for investors to achieve investment diversification. By pooling their funds with those of other investors, individual investors can obtain a level of diversification that they would likely be unable to obtain on their own. Liquidity – Liquidity is the ability to easily convert an asset into cash with little or no effect on its current market value. Because mutual funds are required by law to redeem shares on a daily basis, an investor can redeem his or her shares at the end of each trading day. Most mutual funds also continually offer new shares to investors and allow investors to exchange shares from one fund to another within the fund family, often without cost. Low minimum investment requirements – Most mutual funds require only a relatively small initial investment allowing investors of all income levels to participate in the fund. Usually an amount of $1,000 to $2,500 is sufficient to establish an account, or as little as $100 to $500 with a systematic investment program. Often, retirement accounts have even lower minimum initial investment requirements. The specific investment requirements for each fund are stated in the prospectus. Convenience – Mutual funds offer a wide array of services to investors, including: Checkwriting privileges on money market and some bond funds. Automatic reinvestment of fund dividends. Extensive investor education and other shareholder communications, including newsletters, brochures, retirement and other planning guides, and Web sites. Systematic investing, which allows investors to implement dollar-cost averaging, is an investment strategy where a fixed dollar amount is invested at fixed intervals, usually monthly or quarterly. By investing a fixed amount, investors buy more shares when prices are low and fewer shares when prices are high. Systematic investing alleviates the concern some investors have that they are purchasing at the market’s top and reduces the temptation to time the market. Systematic withdrawals, which allow investors to withdraw a specific dollar amount from the mutual fund at regular intervals. The fund may either send a check directly to the investor or deposit the amount in an account the investor selects. Most funds require withdrawals to meet certain minimum size requirements, often between $50 and $100, and may require a minimum account balance before permitting systematic withdrawals. Go to next slide
- Click to reveal each bullet as you discuss State: While mutual funds can provide a variety of benefits, there are important considerations that investors must take into account before investing, including: Costs – Mutual funds have a number of expenses including sales loads and annual operating expenses. As such, investors should consider whether other investment options, such as individual securities or separately managed accounts, might be more economical over the long term. Lack of transparency – Mutual funds generally only disclose the securities in their portfolios twice a year. Once published, this information can quickly become out of date. As a result, investors are often not able to accurately judge portfolio composition. Style drift – Although mutual funds have a stated investment objective and strategy, investment managers sometimes veer away from these in an attempt to find better investment opportunities and returns. For investors using an asset allocation strategy, style drift can cause their portfolio allocations to become over- or underweighted in a specific area. This could increase the level of risk in their portfolio as well as hurt overall performance. Taxes – Mutual funds can have unfavorable tax consequences for investors. Investors control the timing of when they buy and sell their shares in a fund and the resulting capital gains. However, the portfolio manager determines when to buy and sell securities in the portfolio and when the fund realizes capital gains. Mutual funds must distribute these gains in the year they are realized. For actively traded funds, the taxes on these capital gains distributions can be substantial. When investing through a 401(k), these consequences are less of a consideration as taxes on earnings and capital gains are deferred. Go to next slide
- State: When selecting investments for your portfolio it is essential that you take into consideration both the risks and the returns associated with individual investments and with your portfolio as a whole. In doing this, some of the factors you will need to consider include: Click to reveal each bullet as you discuss Risk tolerance How much risk am I willing and able to assume? How much potential portfolio volatility am I comfortable with? Investment objective Am I concerned primarily with growth or income? How much return will I need from my investments in order to meet my investment objectives? In the case of multiple investment objectives, what are the relative priority of these objectives and how much risk am I willing to take on to achieve these objectives? Time horizon How long will I be investing? How much do I need to be concerned with short-term market volatility? Am I comfortable with assuming additional risk in return for the potential for higher long-term returns? Do I need to be more conservative with my investments as my goals draw near? Asset allocation Do I need to develop an asset allocation plan to help optimize portfolio risk and return? Do I need to reevaluate my asset allocation plan as goals draw near? State: All of these factors are interrelated and should be considered together. For example, an investor who considers herself very conservative and risk averse may find she is comfortable with taking on additional risk in return for the potential for enhanced returns over the long term. In addition, allocating her portfolio over the various asset classes could help her reduce the overall risk in her portfolio. State: It is important to ask yourself these questions upfront and be proactive in taking risk and return into consideration when selecting investments. It also important to consider developing an investment plan that makes use of asset allocation as a means of optimizing risk and return. Go to next slide
- Discuss specific ways that you bring together the firm’s resources and expertise to help investors achieve their goals. You can discuss here: Examples of specific resources within the firm that you leverage Your communications approach You can highlight aspects of your biography and experience that underscore how you work with your clients and how you are committed to helping your clients achieve their goals. State: It was a pleasure to be here with you today. Thank you for your time and attention. I will be here for a while and am happy to answer any questions you may have.