The Decision of How to Allocate • In other words, you control 92% of your investments’ performance 41 * 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) 42 Three Major ASSET CLASSES • Cash • Bonds or Fixed-Income Securities • Stocks or Equities 43 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 44 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 45 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 46 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 47 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 48 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? 49 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! 50 51 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 52 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. 53 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. 54 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 55 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 56 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 57 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. 58 Portfolio Models 59 Portfolio Models – INVESTOR PROFILES Here you can see examples of how educators in different stages of their careers match up with the profiles. 60