A GUIDE TO INVESTMENT BASICS

Learn more to assist you in selecting the investments for your portfolio.

• Investment Objectives
• Investment Rules of Thumb
• Investment Glossary

INVESTMENT OBJECTIVES

What type of investor are you? When you think about investing for your retirement, do you want to take as little risk as possible or do you want to try to achieve higher returns by assuming more risk?

In general, conservative risk-averse individuals tend to choose investments with an income objective while more aggressive individuals look to growth investments. Those somewhere in between conservative and aggressive often explore growth and income investments that combine the benefits of both objectives (See A Guide to Investment Risks).

Since investment risk and long-term return are directly correlated, you should not expect to earn a high investment return without subjecting your investments to the possibility of declining in value. That is, high investment returns over the long-term cannot be achieved without accepting greater investment risk and the chance of declining values over the short term.


INVESTMENT RULES OF THUMB

Following are several "rules of thumb" for investors:

• Common stocks of small, unseasoned companies are more risky than common stock of mid-sized companies.
• Common stocks of mid-sized companies are more risky than common stock of large, well-established companies.
• Investments that try to beat the returns of a given benchmark like the Standard and Poors 500 Index are more risky than investments that try to match the returns of the same benchmark.
• Common stocks of companies located outside the United States are more risky than common stocks of companies located in the United States.
• Investments with high portfolio turnover are usually more risky than investments with low portfolio turnover.
• Investments that are not well diversified – those investments that own 20-30 stocks, for example – are more risky than investments that are well diversified.

INVESTMENT GLOSSARY

Here are some key investment terms that can help you better understand the terms and financial principles you may encounter.

Actively Managed

Funds that buy and sell holdings on a frequent or regular basis are said to be “actively managed” funds.

Asset Allocation

Dividing investment money among various asset classes, like stocks, bonds, and cash.

Bonds

A security that a business or government (lender or issuer) sells to investors. When an investor buys a bond, he or she is lending money to the issuer. The seller of the bond (lender) agrees to repay the principal amount of the loan at maturity. Interest-bearing bonds pay interest periodically. (See Default and Interest rate risk).

Default Risk

Failure of the issuer of a bond (the business or government lending money) to make a scheduled interest payment on time and/or the failure to repay the money borrowed in full at maturity.

Diversification

Investing money among a number of issuers (companies and/or governments that sell securities like stocks and bonds) in different industries, with different maturity dates, and in different geographic locations.

Guaranteed Fund

An investment option offered only by life insurance companies that guarantees: 1) the principal invested will not decline in value as along as the contract remains in force; 2) a rate of interest will be paid on the principal invested for a stated period of time (usually one year); and 3) at retirement, monthly payments for the life of the participant or the joint lives of the participant and his or her spouse.

Index

An unmanaged group of securities (stocks or bonds) whose performance is used as a standard or benchmark of investment performance. For example, Standard & Poor’s 500 Index.

Interest Rate Risk

The risk that the value of a security will change because interest rates change. For example, the price of a bond declines when interest rates rise.

Lehman Brothers Aggregate Bond Index

An unmanaged market value-weighted index for intermediate-term government bonds, investment grade corporate debt securities and mortgage-backed securities.

MSCI EAFE Index

An acronym for Morgan Stanley Capital International (MSCI) Europe, Australia, Far East (EAFE). An unmanaged index of securities listed on the stock exchanges of developed countries in Europe, Australia, and the Far East

Maturity or Maturity Date

The date when the bond issuer (lender) agrees to repay the principal amount to the bond buyer (also known as the investor or the bondholder).

Passively Managed

Funds that buy and sell holdings on an infrequent or irregular basis are said to be “passively managed” funds.

Principal

The amount of money an individual moves into an investment.

Separate Account

Nonguaranted investment option offered only by life insurance companies to participants in qualified retirement plans. Professionally managed investments that can own mutual funds, stocks, bonds and other securities. Investors and retirement plan participants buy units of a separate account and own proportional shares of the total assets owned by the separate account.

S&P 500 (Standard and Poor's 500 Stock Price Index)

A well-known stock market index made up of 500 stocks selected by Standard and Poor's based on industry representation, liquidity and stability.

Stock or Common Stock

A financial instrument (security) that indicates partial ownership of a corporation. Stockholders have indirect control over the management of the corporation by electing board members. Stockholders have a proportional right to share in the corporation’s assets and earnings.