Investing 101: What You Need to Know
Saving for retirement is a journey, and regardless of how far down that path you are, it's never too late to boost your investment knowledge. The following concepts play an important role in how you prepare financially for retirement.
- Stocks and bonds
Stocks, or equities, as they're also called, are shares of ownership in a company. When individuals buy stocks, they become part owner in that company. Bonds, also known as fixed income, are loans that an investor makes to an issuer, such as a company or government. When individuals buy bonds, the borrowers (e.g., companies or governments) pay interest on the loan to investors until it is paid off. Stocks are historically more volatile investments than bonds but have the potential to provide greater returns over the long term, while bonds are generally considered a lower-risk investment but offer lower returns. Investing in bonds still involves risk. Bond prices generally fall when interest rates rise.
Regarding your retirement plan, you probably have the option to choose from a menu of investment funds that have been selected by the plan sponsor (usually your employer). These funds invest in underlying stocks and/or bonds (or other securities) in accordance with each fund's Principal Investment Strategies.
- Asset allocation
Asset allocation is the mix of different types of investment asset classes—such as stocks, bonds and cash—in a portfolio, that can help you meet your objectives and build a financially secure retirement. To determine the asset allocation that's appropriate for you, you'll want to consider a number of factors such as your age, investment goals and tolerance for risk when it comes to investing. For help as you identify the asset allocation that aligns with your long-term investment objectives, check out Mutual of America's Investment Questionnaire.
Diversification is the strategy of having investments in various asset classes and different types of markets, sectors, industries and securities so your exposure to a single area of the market is limited. Think of the phrase: Don't put all your eggs in one basket. Diversification can further reduce risk and volatility in your retirement account over time, while also helping you with your asset allocation decisions. With a properly diversified portfolio, when one area of the market declines, the rest of your portfolio's value would still be relatively insulated by your investments in other areas. It is important to note that diversification does not guarantee investment returns or eliminate the risk of loss.
To learn more about your account and saving for retirement, please contact us.