3. Choose your investments
An important and sometimes confusing step in retirement preparation is choosing which options to invest in. Because each investor has different goals and different circumstances, there is no set strategy that works for everyone.
INVESTMENT TYPES
There are different types of investments in which you may choose to invest your retirement plan contributions. The three main types are:
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Stocks have historically had the greatest risk and highest returns among the three major investment types.
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Bonds are generally less volatile than stocks but offer more modest returns.
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Cash equivalents — such as certificates of deposit, treasury bills and money market funds — are generally the most conservative investments, but offer a lower potential for return than the other major investment types.
Another type of investment, called an Asset Allocation investment, provides investors with a blended portfolio of different types of investments in a single option. These investments are a good option for investors who would prefer to allow professional money managers to make adjustments to their investments as the market fluctuates.
AUL’s Retirement Services products offer flexibility and diversity in investment options through our group annuity contract to help plan participants reach their retirement goals. Participants invest in an AUL separate account, which in turn invests in underlying funds. Plan participants are credited with units of the AUL separate account, not shares of any underlying fund.
UNDERSTANDING RISK AND RETURN
Investment risk is the potential for an investment to lose value. Return is the change in value on an investment. Higher returns are usually associated with greater risks, while investments with lower returns generally have a lower risk level. Understanding the relationship between risk and return is very important as you develop your investment strategy.
The amount of investment risk you are willing to take, also known as your “risk tolerance,” is a personal decision, which can be shaped by many factors including the amount of time you have until retirement, also known as your “time horizon.”
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Risk tolerance — Some people are comfortable taking on the risk of frequent ups and downs of the stock market in return for potentially greater longterm returns. Others prefer the possibility of a slow, steady return with lower risk investments. Understanding your personal attitude toward risk can help you find the right mix of investments for your portfolio.
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Time horizon — The longer you have until retirement, the more risk you can potentially afford to take.
MIXING IT UP WITH DIVERSIFICATION
Because different investment types have varying levels of risk and return, it is important to make sure you have a good mix of investments in your portfolio. This strategy, called diversification, aims to balance risk and reward by allocating assets according to your goals, risk tolerance and investment horizon.
Each group of investments carries its own unique risks. Before investing, please read each fund prospectus for a detailed explanation of the risks, fees, and costs associated with each underlying investment. Although you might reduce volatility and risk with diversification, you can’t eliminate investment risk altogether. The use of asset allocation and diversification does not ensure a profit or protect against loss.
Bond funds have the same interest rate, inflation and credit risks that are associated with the underlying bonds owned by the fund.
Money Market funds are not typically insured or guaranteed by the Federal Deposit Insurance Corporation or any other federal government agency. Although they seek to preserve the value of your investment at $1.00 per share, it’s possible to lose money by investing in money market funds. |