Core Income Enrollment Booklet

Understanding Your Investment Strategy

Asset Allocation Asset allocation is dividing your money into different asset classes, such as stable value, stock funds, or bond funds. Since these funds can experience gains and losses at different times, spreading your investments between funds can help balance fluctuations in your account performance. Having an effective asset allocation mix can be the most important factor in the performance of your retirement account. Diversification Diversification is a technique used to control risk by investing in different types of mutual funds that would each react differently to the same event in the market. Your risks can be minimized through diversification. For example: Let’s say you have a portfolio of funds that are heavily invested in airline companies. It is publicly announced that airline pilots are going on an indefinite strike and all flights are canceled. Share prices of airline stocks drop. In this scenario, your portfolio will experience a noticeable decline in value. However, if you counterbalanced funds weighted in the airline industry with funds weighted in the financial industry, only a portion of your portfolio would be affected.

Most investment professionals agree, although it does not guarantee against loss, diversification is a very important component of reaching long-range financial goals while minimizing risk.

Portfolio Rebalancing Portfolio rebalancing enables you to control the risk level and minimize risk. The asset mix originally created by an investor inevitably changes as a result of differing returns among various securities and asset classes. As a result, the percentage you allocated to different asset classes changes. As you can see from the example to the right, the participant started with four funds at $25 each. The participant established a portfolio of 50 percent aggressive (stocks) and 50 percent conservative (bonds) funds.

OPENING BALANCE March 31

CLOSING BALANCE June 30

Stock Fund A

$25.00 Stock Fund A

$30.00

Stock Fund B

$25.00 Stock Fund B

$35.00

Bond Fund C

$25.00 Bond Fund C

$20.00

Bond Fund D

$15.00

$25.00 Bond Fund D

Mix 50% Aggressive 50% Conservative

New Mix 65% Aggressive 35% Conservative

Over the course of three months, stock funds increased in value and bond funds decreased (they tend to fluctuate opposite each other). As a result, the participant has a new mix of 65 percent aggressive and 35 percent conservative–more risk than the participant wanted to take. This is when the participant needs to rebalance. The participant will need to sell 15 percent worth of his or her stock funds and buy into the bond funds (sell high, buy low).