What you will learn today. Different categories of investments Choosing your investment mix Common investor pitfalls Determining your next steps

Transcription

1 Investing 101

2 What you will learn today Different categories of investments Choosing your investment mix Common investor pitfalls Determining your next steps 2

3 Asset Allocation One of Your Most Important Investment Decisions Allocate your investments strategically across three main asset classes to: Stocks Higher Potential Risk Higher Potential Return Moderate Potential Risk Moderate Potential Return Help reduce portfolio risk and volatility Match your investment strategy to your time horizon, financial situation, and risk tolerance Enhance potential for increased and more consistent returns Tap into market opportunities Avoid the pitfalls of market timing Short-Term Lower Potential Risk Lower Potential Return Up to 91.5% of variations in returns can be attributed to asset allocation.* Asset allocation does not ensure a profit or guarantee against loss. *Percentages represent the influence specific factors have historically had on the variation of returns of a portfolio. Note: The information contained in this graph comes from Determinants of Portfolio Performance by Gary P. Brinson, L. Randolph Hood, and Gilbert L. Beebower, which was published in the July/August 1986 edition of the Financial Analysts Journal. This study was updated by Brinson, Brian D. Singer, and Beebower in the May/June 1991 edition of the Financial Analysts Journal. The update analyzed quarterly data from 82 large U.S. pension plans over the period Past performance is no guarantee of future results, and results may vary depending on market conditions and an individual s particular asset allocation and security allocation. 3

4 Diversification Means Spreading Your Investments Across Styles within an Asset Class Diversify within asset classes to help moderate risk and potentially improve return. Large DOMESTIC STOCK Value Blend Large-Cap Value Large-Cap Blend Large-Cap Medium Mid-Cap Value Mid-Cap Blend Mid-Cap Small Small-Cap Value Small-Cap Blend Small-Cap FIXED INCOME INTERNATIONAL Corporate Municipal Government High Yield Country/ Regional Diversified Diversification does not ensure a profit or guarantee against loss. The value of securities of smaller issuers may be more volatile than those of larger issuers. Value stocks can perform differently from the market as a whole. They can remain undervalued by the market for long periods of time. Lower-quality securities generally offer higher yields, but also carry more risk. International investments involve greater risk and may offer greater potential return than U.S. investments. These risks include political and economic risks as well as the risk of currency fluctuations, all of which may be magnified in emerging markets. Stock values are more volatile than other securities because they fluctuate in response to the activities of individual companies, and to general market and economic conditions. You may have a gain or loss when you sell your shares

5 The Case for Diversification Investment Style Winners and Losers Rotate over Time, Even within Equities Investment style winners and losers rotate over time Value Blend Value 2006 Blend Value 2007 Blend Large Large Large Mid-Cap Mid-Cap Mid-Cap Small Small Small Value 2008 Blend Value 2009 Blend Value 2010 Blend Large Large Large Mid-Cap Mid-Cap Mid-Cap Small Small Small Best-performing style Worst-performing style Neither diversification nor asset allocation ensures a profit or guarantees against loss. Source: Frank Russell Company, as of 12/31/2010 Past performance is no guarantee of future results. Styles are represented by: Large Value = Russell 1000 Value, Large Blend = Russell 1000, Large = Russell Mid Value = Russell Midcap Value, Mid Blend = Russell Midcap, Mid = Russell Midcap. Small Value = Russell 2000 Value, Small Blend = Russell 2000, Small = Russell

6 Sub Asset Classes within the Bond Family Essentially, there are three categories of bonds. U.S. Treasury Stocks Corporate Municipal Short-Term Although bonds generally present less short-term risk and volatility than stocks, bonds do contain interest rate risk (as interest rates rise, bond prices usually fall, and vice versa) and the risk of default, or the risk that an issuer will be unable to make income or principal payments. Additionally, bonds and short-term investments entail greater inflation risk, or the risk that the return of an investment will not keep up with increases in the prices of goods and services, than stocks. These are examples of sub asset classes; there are other potential sub asset classes. 6

7 The Size of the Bond Market Outstanding U.S. Bond Market Debt and U.S. Equity Holdings Breakdown of Outstanding U.S. Bond Market Debt by Major Category Equity Investments $16.8 Trillion 32% Bond Investments $35.9 Trillion 68% Asset- Backed Securities 6% Money Market Agency 8% 7% Municipal 8% U.S. Treasuries 25% Mortgage-Related Securities 25% U.S. Corporate 21% As of April 29, 2011 As of March 17, 2011 Sources: Dow Jones U.S. Total Stock Market Index and SIFMA. The SIFMA bond market data is compiled from U.S. Department of the Treasury, Federal Reserve System, Federal Agencies, Thomson Financial, Bloomberg, and SIFMA data. Asset-backed and Corporate Debt estimated by SIFMA. Treasuries defined as interest bearing marketable public debt. Mortgage-related includes GNMA, FNMA, and FHLMC mortgage-backed securities and CMOs and private-label MBS/CMOs. Money Market includes commercial paper, bankers acceptances, and large time deposits. Beginning in 2006, bankers acceptances are excluded. 7

8 Interest Rates Impact the Bond Market When interest rates move up or down, bond prices usually move in the opposite direction. Interest Rates Bond Prices Interest Rates Bond Prices Although bonds generally present less short-term risk and volatility than stocks, bonds do contain interest rate risk (as interest rates rise, bond prices usually fall, and vice versa) and the risk of default, or the risk that an issuer will be unable to make income or principal payments. Additionally, bonds and short-term investments entail greater inflation risk, or the risk that the return of an investment will not keep up with increases in the prices of goods and services, than stocks. 8

9 Determining your investment mix It s about solving for these three factors: Time Risk Financial situation Neither diversification nor asset allocation ensures a profit or guarantees against loss 9

10 Choosing your investments: hands on or hands off? Do you want to make your own investment decisions? Are you comfortable building your own portfolio? Do you have the time to actively manage your investments? Hands off Lifecycle Funds*: Provide an automatic investment mix that becomes continually more conservative as time goes on. Just pick the fund with the year that s closest to when you plan to retire. Let us guide you: Use our investment guidance tool, Portfolio Review, ** to identify a target investment mix, receive a model portfolio suggestion, and easily implement your strategy. Hands on Do it yourself: Access Fidelity s research resources, and utilize our fund selection tools to help build your own portfolio. *Lifecycle funds are designed for investors expecting to retire around the year indicated in each fund s name. The investment risks of each lifecycle fund change over time as its asset allocation changes. They are subject to the volatility of the financial markets, including equity and fixed income investments in the U.S. and abroad and may be subject to risks associated with investing in high yield, small cap and foreign securities. Principal invested is not guaranteed at any time, including at or after their target dates. ** Portfolio Review is an educational tool. Guidance provided by Fidelity is educational in nature, is not individualized and is not intended to serve as the primary or sole basis for your investment or tax-planning decisions. Neither diversification nor asset allocation ensures a profit or guarantees against loss 10

11 Determine Your Appropriate Target Asset Mix Short-Term Conservative Balanced Aggressive 100% Short Term 50% 6% Intl 30% Short Term 14% Stocks 15% Intl 40% 10% Short Term 35% Stocks 21% Intl 25% 5% Short Term 49% Stocks 25% Intl 15% Most Aggressive 30% Intl 60% Stocks 70% Stocks May be appropriate for investors who Seek to preserve capital Seek to minimize fluctuations in market values Seek potential for capital appreciation and some growth Have a preference for growth Seek aggressive growth Seek very aggressive growth Can accept the lowest returns in exchange for price stability Take an incomeoriented approach with some potential for capital appreciation Can withstand moderate fluctuations in market value Can withstand significant fluctuations in market value Can tolerate wide fluctuations in market values, especially over the short term Can tolerate very wide fluctuations in market values, especially over the short term The purpose of the target asset mixes is to show how target asset mixes may be created with different risk and return characteristics to help meet a participant s goals. You should choose your own investments based on your particular objectives and situation. Remember that you may change how your account is invested. Be sure to review your decisions periodically to make sure they are still consistent with your goals. You should also consider any investments you may have outside the plan when making your investment choices. These target asset mixes were developed by Strategic Advisers, Inc., a registered investment adviser and a Fidelity Investments company, based on the needs of a typical retirement plan participant. 11

12 Common Investor Pitfalls Chasing hot performance Trying to time the market Emotional, panic selling Avoiding the market Investing without sufficient research and understanding Viewing investing as a one-time task Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money. 12

13 Attempting to Time the Market Doesn t Work for Most Investors $100,000 Hypothetical Value of $10,000 Invested from Year-End ( ) $80,000 $60,000 $57,511 $40,000 $20,000 $17,726 $19,709 $0 Stayed in the market Missing best 15 months Treasury bills Attempting to move in and out of the market can be a costly affair, particularly because a significant portion of the market s gains over time have tended to come in concentrated periods. Data Source: Ibbotson Associates, Past performance is no guarantee of future results. Returns include the reinvestment of dividends and other earnings. This chart is for illustrative purposes only and does not represent actual or future performance of any investment option. Stocks are represented by the Standard & Poor s 500 Index (S&P 500 Index). The S&P 500 Index is a registered service mark of The McGraw-Hill Companies, Inc., and has been licensed for use by Fidelity Distributors Corporation and its affiliates. It is an unmanaged index of the common stock prices of 500 widely held U.S. stocks that includes the reinvestment of dividends. Stock prices are more volatile than those of other securities. It is not possible to invest directly in an index. U.S. Treasury bills, which are backed by the full faith and credit of the U.S. government, maintain a stable value (if held to maturity), but returns are generally only slightly above the inflation rate. 13

14 Return Percentage (%) Short-Term News May Potentially Drive Panic Decisions, but Time Has Historically Cushioned Market Volatility 200% 162.9% 150% Best and worst returns, % 50% 0% -50% -100% 32.7% 15.2% -67.6% -5.6% 36.1% 19.5% 11.1% 0.0% -17.4% 21.4% 13.7% 18.3% 10.5% 7.7% 0.7% 0.1% 9.2% 1.2% 0.1% 1.9% 1.6% 0.4% -4.9% 1 Year 5 Years 10 Years 20 Years Stocks Short-Term This chart was prepared by Strategic Advisers, Inc., a Fidelity Investments company, using data provided by Ibbotson Associates, Inc., as of 12/31/2010. This chart is for illustrative purposes only and not indicative of any investment. Stocks are represented by the Standard & Poor s 500 Index, which is an unmanaged group of securities considered to be representative of the stock market in general. Intermediate-Term are represented by a U.S. Intermediate-Term Government Bond Index, and Short-term Investments by a 30-day U.S. Treasury bill. Stock prices are more volatile than those of other securities. Government bonds and corporate bonds have more moderate short-term price fluctuations than stocks, but provide lower potential long-term returns. U.S. Treasury bills maintain a stable value if held to maturity, but returns are generally only slightly above the inflation rate. You cannot invest directly in an index. Asset allocation does not ensure a profit or guarantee against loss. Past performance is no guarantee of future results, and results may vary based on market conditions and an individual s particular asset allocation and security selection. 14

15 Asset Allocation % Portfolios Can Shift over Time Monitoring and Rebalancing May Be Critical to Success 100% Rebalance your portfolio at least once a year or as your goals or personal circumstances change December 1990 December 2010 Target Asset Mix: 50% Stocks, 40%, 10% Short-Term Investments 75% 50% 25% 0% 50.00% 71.80% 63.94% 40.00% 31.68% 23.64% 10.00% 4.56% 4.38% Stocks Short-Term Investments Data Source: Ibbotson Associates, 2010 ( ). Stocks are represented by the S&P 500 Index, and bonds are represented by the Lehman Brothers Aggregate Bond Index for bonds. The Lehman Brothers Aggregate Bond Index is an unmanaged market value-weighted index for investment-grade fixed-rate debt issues, including government, corporate, asset-backed, and mortgage-backed securities with maturities of at least one year. Short-term instruments are represented by U.S. Treasury bills, which are backed by the full faith and credit of the U.S. government. The S&P 500 Index is a registered service mark of The McGraw-Hill Companies, Inc., and has been licensed for use by Fidelity Distributors Corporation and its affiliates. It is an unmanaged index of the common stock prices of 500 widely held U.S. stocks that includes the reinvestment of dividends. Indices are unmanaged and you cannot invest directly in an index. Past performance is no guarantee of future results. This chart is for illustrative purposes only. 15

16 A tale of two savers $1,353,932 VALUE AGE 67 Maria Start Age 25 $10,000 contributed annually for 10 years $1,197,286 Tom Start Age 35 $10,000 contributed annually for 32 years $100,000 Contribution $320,000 Contribution AGE This hypothetical example is based on monthly contributions made at the beginning of the month to a tax-deferred workplace savings plan and a 7% annual rate of return compounded monthly. Your own plan account may earn more or less than this example, and income taxes will be due when you withdraw from your account. Investing in this manner does not ensure a profit or guarantee against loss in declining markets. 16

17 Next Steps Enroll in your plan Set your savings contribution rate Choose your investments Pay down high interest credit card debt Create a budget and find ways to save more Simplify your accounts 17

18 Important Information Before investing in any mutual fund, please carefully consider the investment objectives, risks, charges and expenses. For this and other information, call or write Fidelity for a free prospectus or, if available, a summary prospectus. Read it carefully before you invest. Foreign investments, especially those in emerging markets, involve greater risk and may offer greater potential returns than U.S. investments. This risk includes political and economic uncertainties of foreign countries, as well as the risk of currency fluctuation. Investments in mid-sized companies may involve greater risks than those in larger, more well known companies, but may be less volatile than investments in smaller companies. Investments in smaller companies may involve greater risks than those in larger, more well known companies. Lower-quality debt securities involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Because of their narrow focus, sector funds may be more volatile than funds that diversify across many sectors. In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible. Company stock is neither a mutual fund nor a diversified or managed investment option. Over time, the value of your account will vary and you may have more or less than the original amount invested FMR LLC. All rights reserved. Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI