Before you can decide what asset classes and

vehicles to invest in, it’s good to think about your financial goals and investment horizon. Is money for retirement your main priority? Or is it saving for your child’s college education or a major purchase like a house? Understanding your risk tolerance is also important. How would you react if an investment declined by 20 percent in the span of a day? A MoneySteps coach can talk through these questions and help you prioritize your financial goals!

Time Horizon: The length of time which an investment is held before you need the money. Your investment goals should match your time horizon. For example, money that you want to use for a new car in six months should not be in the stock market, which can be volatile. Money for retirement that is 30 years away can be invested in the market to reflect the longer time horizon.

Risk Tolerance: The degree of volatility that each investor can stomach. Each investor has a different risk tolerance and investment horizon. John Bogle, founder of the Vanguard Group, famously said, “if you have trouble imagining a 20 percent loss in the stock market, you shouldn’t be in stocks.”

Asset Allocation: The way investments are divided between stocks, bonds and cash. This division is typically a function of an investor’s goals, risk tolerance and time horizon. Each asset class has different levels of projected risk and return.

Time and Risk

2037I N V E S T M E N T

Financial terms can seem intimidating and confusing,

but they don’t have to be. In fact, devoting a little time now

to familiarize yourself with the jargon of finance can be

one of the best investments you make, one that can

yield a lifetime of financial dividends.

Getting Started

Investing

Would you rather receive $1 million at the start

of a month, or one penny that doubles each day for 30 consecutive days – in effect earning 100% interest each day? Read on and find the answer at the end of this section!

Principal: The original amount invested in a particular investment.

Compound Interest: The interest on the initial principal and on the accumulated interest. Often thought of as “interest on interest.” Albert Einstein once called compound interest, “the eighth wonder of the world.”

Interest

Start with one penny and double the amount each day x 30 days

$5,368,709.12

“ the eighth wonder of the world”

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There are three main classes of investment. Stocks, bonds, and cash are the basis for most investment funds - either mutual funds or exchange traded funds.

Stock: A type of investment that represents an ownership interest in a corporation – also called a “share”.

Bond: A type of investment in which an investor loans money to an entity such as a corporation or government. The money is borrowed for a defined period of time and interest rate. The credit quality and time period typically determine the bond’s interest rate. The three mains types of bonds are Corporate, Municipal and U.S. Treasury.

Cash: Bank savings accounts and money-market funds are typically highly accessible (liquid) and have a low-risk, low-return profile.

Asset Classes

Investing in an individual stock or bond can be

risky. One way to potentially limit some of that risk while still giving yourself a chance at upside is to invest in a fund vehicle. Funds typically invest in a basket of stocks or bonds, which provides a greater degree of diversification.

Mutual Fund: A professionally managed fund – pooled by money from many investors – that invests in assets such as stocks and bonds. A mutual fund can hold anywhere from a handful to hundreds of individual stocks and bonds. The money manager is responsible for the buy and sell decisions.

Exchange-Traded Fund (ETF): A security that seeks to replicate the return of an underlying securities index. The low fees and variety of investment styles have made ETFs increasingly popular.

Investing Fund Examples

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©2017 PFT Employee Benefit Solutions, Inc. A120-54 (10-17)

Employer sponsored retirement plans (401k/403b plans): Employees can designate a portion of their gross salary to these popular retirement vehicles. The investment earnings accrue tax free until the money is withdrawn. Some organizations match a certain percentage of the employee’s contributions. There are restrictions on when employees may withdraw these assets; penalties usually apply if the withdrawal comes before retirement age.

Individual Retirement Account (IRAs): An individual investing vehicle for retirement that carries tax benefits. The two main ones are:

Traditional IRA: Typically, contributions are fully or partially tax deductible. Earnings and dividends are not taxed until distributed upon retirement.

Roth IRA: Contributions are made on an after tax basis. From there, your account grows 100 percent tax free with no taxes due upon retirement. For both a Traditional IRA and Roth IRA, there are penalties for withdrawing the money before retirement.

529 Plans: These plans promote savings for future college costs by offering and incentivizing tax advantages. The earnings are not subject to federal tax – and in most cases state tax – if the withdrawals are used for eligible college expenses, such as tuition, room and board, books, computers and mandatory fees.

Health Savings Accounts (HSAs): A tax favored account that allows you to save for the Qualified High Deductible Health Plan’s deductible and coinsurance with pre-tax dollars. Funds can be spent tax free on medical expenses, and at age 65 these funds can be used to pay for Medicare premiums or can be taken as taxable income.

Tax-Advantaged Investing

Consider how taxes impact investment gains. A smart strategy may be to utilize all available tax-advantaged investing options. Tax-advantaged investing can be thought of as investments where taxes are deferred until the future, giving your money longer to compound tax-free before owing the tax man.