Investing Basics and Your Retirement€¦ · Roberto Rizza, CRPC® Financial Advisor CUSO Financial...

Christian Financial Credit UnionRoberto Rizza, CRPC®

Financial AdvisorCUSO Financial Services, LP

18441 Utica RoadRoseville, MI 48066

[email protected]

www.christianfinancialcu.org

Investing Basics and Your Retirement

June 27, 2013 of 8, see disclaimer on final page

Saving and Investing Wisely for Retirement

The benefits of saving in anemployer-sponsored retirementplan

The more you can save for retirement, thebetter your chances of retiring comfortably.One of the best ways to save for retirement isto max out your contributions to anemployer-sponsored retirement plan, such asa 401(k) plan, up to the legal limit.

Why are employer-sponsored retirement planssuch a good retirement investment? Onereason is that your pretax contributions to youremployer's plan lower your taxable income forthe year. This means you save money in taxeswhen you contribute to the plan. For example,if you earn $100,000 per year and youcontribute $10,000 to a 401(k) plan, you'll payincome taxes on $90,000 instead of $100,000.

Another reason is the power of tax-deferredgrowth. With an employer-sponsoredretirement plan, any investment earnings havethe potential to compound year after year andaren't taxable as long as they remain in theplan. Over the long term, deferring taxes couldleave you with a much larger balance thanthat of someone who invests the sameamount in taxable investments at the samerate of return. Keep in mind that when you dotake withdrawals from an employer-sponsoredretirement plan, federal and state incometaxes will be due at current rates. Also, earlywithdrawals will generally be subject to a 10%penalty tax.

Why is it important to investyour retirement savings wisely?

To try to fight inflation

When people say, "I'm not an investor," it'soften because they worry about the potentialfor market losses. It's true that investinginvolves risk (e.g., investment losses) as wellas reward, and investing is no guarantee thatyou'll beat inflation or even come out ahead.However, there's also another type of loss tobe aware of: the loss of purchasing powerover time. During periods of inflation, eachdollar you've saved for retirement will buy lessand less as time goes on.

To take advantage of compounding

Anyone who has a savings accountunderstands the basics of compounding: Thefunds in your savings account earn interest,and that interest is added to your accountbalance. The next time interest is calculated,it's based on the increased value of youraccount. In effect, you earn interest on yourinterest.

Example of compounding interest

Compounding works similarly over time withinvestment earnings. Let's say you invest$5,000 a year for 30 years (see illustration).After 30 years you will have invested a total of$150,000. Yet, assuming your funds grow atexactly 6% each year, after 30 years you willhave over $395,000 because of compounding.

Note: This is a hypothetical example and isnot intended to reflect the actual performanceof any specific investment. Taxes andinvestment fees and expenses are notreflected. If they were, the results would belower.

Compounding has a "snowball" effect, whichcan be advantageous when saving forretirement. The more money that is added to aretirement account, the greater its benefit. Thesooner you start saving or investing forretirement, the more time and potential yourinvestments have for growth. In effect,compounding helps you save for retirement bydoing some of the work for you.

The more you can save forretirement, the better yourchances of retiringcomfortably. Some ways toget started include:

• Start saving as early aspossible

• Invest on a regular basis

• If you participate in anemployer-sponsoredretirement plan, takeadvantage of automaticcontributions

• If your plan allows, makeappropriate investmentchoices for yourretirement time frame

of 8, see disclaimer on final page

Creating an Investing Road Map for Retirement

Set retirement goals

Setting goals for retirement is an importantpart of retirement investing. For example, doyou want to retire early? Would you like totravel during retirement? Do you plan onworking post-retirement? Having goals canhelp you and your financial professionaldevelop an appropriate investment plan foryour retirement.

Think about your time horizon

One of the first questions you should askyourself before you invest for retirement is"When will I need the money?" Will it be in 3years or 30? Your time horizon for when youwould like to retire will have a significantimpact on your retirement investment strategy.

The general rule is: the longer your timehorizon, the more risky (and potentially morelucrative) investments you may be able tomake. Many financial professionals believethat with a longer time horizon, you can rideout fluctuations in your investments for thepotential of greater long-term returns. On theother hand, if your time horizon is very short,you may want to concentrate your investmentsin less risky vehicles because you may nothave enough time to recoup losses shouldthey occur.

Understand your risk tolerance

Another important question is "What is myinvestment risk tolerance?" How do you feelabout the potential of losing your hard-earnedmoney? Many investors would forgo thepossibility of a large gain if they knew therewas also the possibility of a large loss. Otherinvestors are more willing to take on greaterrisk to try to achieve a higher return. You can'tcompletely avoid risk when it comes toinvesting, but it's possible to manage it.

Almost universally, when financialprofessionals or the media talk aboutinvestment risk, their focus is on pricevolatility. Advisors label as aggressive or riskyan investment whose price has been prone to

In general, the risk-reward relationship makessense to most people. After all, no sensibleperson would make a higher-risk investmentwithout the prospect of a higher reward fortaking that risk. That is the tradeoff. As aninvestor, your goal is to maximize returnswithout taking on more risk than is necessaryor comfortable for you. If you find that youcan't sleep at night because you're worryingabout your investments, you've probablyassumed too much risk. On the other hand,returns that are too low may leave you unableto reach your retirement goals.

The concept of risk tolerance refers not only toyour willingness to assume risk but also toyour financial ability to endure theconsequences of loss. That has to do withyour stage in life, how soon you'll need themoney for retirement, and your retirementgoals.

Remember your liquidity needs

Liquidity refers to how quickly you can convertinvestments into cash. For example, as aninvestment your home would be consideredrelatively illiquid, since it can take a very longtime to sell. Publicly traded stock, on the otherhand, tends to be fairly liquid.

Your need for liquidity will affect the types ofinvestments you might choose to meet yourretirement goals. For example, if you have anemergency fund, you're in good health, andyour job is secure, you may be willing to holdsome less liquid investments that may havehigher potential for gain. However, youprobably don't want to invest money you'llneed in the next couple of years in less liquidassets. Also, having some relatively liquidinvestments may help protect you from havingto sell others when their prices are down.

dramatic ups and downs in the past, or thatinvolves substantial uncertainty andunpredictability. Assets whose priceshistorically have experienced a narrowerrange of peaks and valleys are consideredmore conservative.


Types of Retirement Plan Investments: Stocks

How do stocks work?

When you buy a company's stock, you'repurchasing a share of ownership in thatbusiness. You become one of the company'sstockholders. Your percentage of ownership ina company also represents your share of therisks taken and profits generated by thecompany. If the company does well, yourshare of its earnings will be proportionate tohow much of the company's stock you own. Ofcourse, your share of any loss also will reflectyour percentage of ownership.

Stocks by sizeSize Description

Large cap • $10+ billion• Widely bought and sold• Often are well-known

names

Midcap • $2 billion-$10 billion• Somewhat smaller than

large caps

Small cap • $200 million-$2 billion• Less widely traded• Fewer institutional investors

Microcap • $20 million-$200 million• May trade infrequently• More difficult to research

Note: Different organizations define theseranges in different ways, and the ranges canvary over time.

If you purchase stock, you can make money inone of two ways. The company's board ofdirectors can decide to distribute a portion ofthe company's profits to its shareholders asdividends, which can provide you with income.Also, if the value of the stock rises, you maybe able to sell your stock for more than youpaid for it. Of course, if the value of the stockhas declined, you'll lose money.

The role of stocks in yourretirement portfolio

Though past performance is no guarantee offuture results, stocks historically have hadgreater potential for higher long-term totalreturns than cash alternatives or bonds.However, that potential for greater returnscomes with greater risk of volatility andpotential for loss. You can lose part or all ofthe money you invest in a stock. Because ofthat volatility, stock investments may not beappropriate for money you count on to beavailable in the short term. You'll need to thinkabout whether you have the financial andemotional ability to ride out those ups anddowns as you try for greater returns.

The universe of stock mutual funds offersenormous flexibility to construct a portfolio thatis tailored to your needs. There are manydifferent types of stock, and many differentways to diversify your stock holdings.

Growth stocks are usually characterized bycorporate earnings that are increasing at afaster rate than their industry average or theoverall market. Income stocks (for example,utilities or financial companies) generally offerhigher dividend yields than market averages.Value stocks are typically characterized byselling at a low price relative to a company'ssales, earnings, or book value.

These are only some of the many ways inwhich stocks can be identified. With stocks, it'sespecially important to diversify your holdings.That way, if one company is in trouble, it won'thave as much impact on your overall return asit would if it represented your entire retirementportfolio.

Advantages of Stocks

• Historically, have hadgreater potential for higherlong-term total return thancash or bonds

• Easy to buy and sell

• Can provide capitalappreciation as well asincome from dividends

• Ownership rights

Tradeoffs

• Poor company performancecan affect dividends andshare value

• Greater risk to principal

• May not be appropriate forshort-term investment

• Subject to market volatility

Before investing in a mutualfund, carefully consider theinvestment objectives, risks,charges, and expenses ofthe fund. This informationcan be found in theprospectus, which can beobtained from the fund.Read it carefully beforeinvesting.


Types of Retirement Plan Investments: Bonds

How do bonds work?

A bond is basically an IOU. Bonds, sometimescalled fixed-income securities, are essentiallyloans to a corporation or governmental body.The borrower (the bond issuer) typicallypromises to pay the lender, or bondholder,regular interest payments until a certain date.At that point, the bond is said to havematured. When it reaches that maturity date,the full amount of the loan (the principal orface value) must be repaid.

A bond typically pays a stated interest ratecalled the coupon, a term that dates back tothe days when a bondholder had to clip acoupon attached to the bond and mail it in toreceive each interest payment. Most bondspay interest on a fixed schedule, usuallyquarterly or semiannually, although some payall interest at maturity along with the principal.

There are two fundamental ways that you canprofit from owning bonds. The most obvious isthe interest that bonds pay. However, you canalso make money if you sell a bond for more

The role of bonds in yourretirement portfolio

One of the most important reasons thatinvestors choose bonds is for their steady andpredictable stream of income through interestpayments. Bonds have traditionally beenimportant for retirees for this reason. Also,though they are not risk-free--for example, abond issuer could default on a payment oreven fail to repay the principal--bonds areconsidered somewhat less risky than stocks.In part, that's because a corporation must payinterest to bondholders before it paysdividends to its shareholders. Also, if itdeclares bankruptcy or dissolves, bondholdersare first in line to be compensated.

The bond market often behaves verydifferently from stocks. For example, whenstock prices are down, investors often preferbonds because of their relative stability andinterest payments. Also, when interest ratesare high, bond returns can be attractiveenough that investors decide not to assumethe greater risk of stocks. Interest from bondscan help balance stock fluctuations andincrease a portfolio's stability. And because abond's face value gets repaid upon maturity,you can choose a bond that matures whenyou need the money.

than you paid for it. As with any security, bondprices move up and down in response toinvestor demand; they also are sensitive tochanges in interest rates. A bond that is soldbefore its maturity date may be worth more orless than its face value, depending on how itsinterest rate compares to others.

Types of Retirement Plan Investments: Cash andCash Alternatives

Cash and cash alternatives

In daily life, cash is all around you, ascurrency, bank balances, negotiable moneyorders, and checks. However, in investing,"cash" is also used to refer to so-called cashalternatives: investments that are consideredrelatively low-risk and can generally beconverted to cash quickly. Money marketmutual funds and guaranteed investmentcontracts (GICs), government savings bonds,U.S. Treasury bills, and commercial paper aresome examples of cash alternatives.

Advantages of Bonds

• Generally, a predictablestream of income

• Income typically higher thancash investments

• Relatively lower riskcompared to stocks

• Low correlation with stockmarket

Tradeoffs

• Risk of default

• Bond values fluctuate withinterest rates

• Generally, lower potentiallong-term returns comparedto stocks

An investment in the fund isnot insured or guaranteedby the Federal DepositInsurance Corporation orany other governmentagency. Although the fundseeks to preserve the valueof your investment at $1.00per share, it is possible tolose money by investing inthe fund.

Before investing in a mutualfund, carefully consider theinvestment objectives, risks,charges, and expenses ofthe fund. This informationcan be found in theprospectus, which can beobtained from the fund.Read it carefully beforeinvesting.

Advantages of Cash

• Predictable earnings

• Highly liquid

• Relatively low risk toprincipal

Tradeoffs

• Relatively low returns

• May not outpace inflation


Using cash alternatives

Because of their conservative nature, cashalternatives involve the least risk. However,there is a tradeoff for their relative safety: theirpotential return is not as high as the return oninvestments that involve more risk. Byfocusing solely on playing it safe, you maylimit your investment income, especially overlonger time periods.

Cash alternatives can be useful in many ways.

First, they can provide relative stability. Whilecash alternatives can't assure you of a gain orprotect you from losses, they are generallyconsidered safer than other asset classes,such as stocks or bonds. Also, they canprovide income on cash that would otherwisebe idle. Readily available cash also can helpyou cope in a financial emergency. Finally,cash alternatives can serve as a temporaryparking place when you're not sure where toinvest.

Investing for Retirement with Mutual FundsYou can invest in all three major asset classesthrough mutual funds, which pool your moneywith that of other investors. Each fund'smanager selects specific securities to buybased on a stated investment strategy.

Mutual funds offer two key benefits. Becausemost mutual funds own dozens or hundreds ofsecurities, you achieve greater diversificationthan you would by buying a few individualsecurities on your own. Also, the fundmanager's expertise is part of what you payfor in buying mutual fund shares.

A mutual fund may invest in one of the threemajor asset classes, or combine them. Forexample, a balanced fund typically includesstocks and bonds. With an actively managedmutual fund, the fund manager buys and sellsspecific securities, trying to beat a benchmarkindex such as the S&P 500. A passivelymanaged or index fund tries to match thereturn of a specific index by holding only thesecurities included in that index.

Some mutual funds attempt to tailor each

Life cycle or target date funds tend to beavailable in series; each fund in the seriestargets a different time horizon. The "targetdate" is the approximate date when aninvestor expects to begin withdrawing moneyfrom the fund. For example, someoneinvesting for retirement in a fund with a targetdate of 2030 typically expects to retire in 2030and begin tapping the fund for income.

Note: Before investing in a mutual fund,carefully consider its investment objectives,risks, fees, and expenses, which can be foundin the prospectus available from the fund.Read it carefully before investing.

fund's asset allocation not only to your risktolerance, but to how soon you expect to usethat money. These types of funds, known aslife cycle or target-date funds, tend to set andadjust a given asset allocation based on agiven date in the future, shifting the mix ofinvestments gradually over time to increasethe focus on capital preservation as the targetdate approaches.

Advantages of Mutual Funds

• Professional moneymanagement

• Small investment amounts

• Diversification

• Liquidity

Tradeoffs

• Fluctuating share values

• Some money kept in cashfor fund liquidity needs

• Mutual fund fees andexpenses


Asset AllocationThe combination of investments you choosefor your retirement portfolio can be asimportant as your specific investments. Themix of various asset classes, such as stocks,bonds, and cash alternatives, account formost of the ups and downs of a portfolio'sreturns.

Deciding how much of each you shouldinclude is one of your most important tasks asan investor. The balance between potential forgrowth, income, and stability is called yourasset allocation. It doesn't guarantee a profitor insure against a loss, but it does help youmanage the level and type of risks you face.

Balancing risk and return

Ideally, you should strive for an overallcombination of investments that minimizes therisk you take in trying to achieve a targetedrate of return. This often means balancingmore conservative investments against othersthat are designed to provide a higher returnbut that also involve more risk. For example,let's say you want to get a 7.5% return on yourmoney. You learn that in the past, stockmarket returns have averaged about 10%annually, and bonds roughly 5%. One way totry to achieve your 7.5% return would be bychoosing a 50-50 mix of stocks and bonds. Itmight not work out that way, of course. This isonly a hypothetical illustration, not a realportfolio, and there's no guarantee that eitherstocks or bonds will perform as they have inthe past. But asset allocation gives you aplace to start.

Many publications feature model investmentportfolios that recommend generic assetallocations based on an investor's age. Thesecan help jump-start your thinking about how todivide up your investments. However,because they're based on averages andhypothetical situations, they shouldn't be seenas definitive. Your asset allocation is--orshould be--as unique as you are. Even if twopeople are the same age and have similarincomes, they may have very different needsand goals for retirement. You should makesure your asset allocation is tailored to yourindividual circumstances.

Many ways to diversify

When financial professionals refer to assetallocation, they're usually talking about overallclasses: stocks, bonds, and cash or cashalternatives. However, there are others thatalso can be used to complement the majorasset classes once you've got those basicscovered.

Even within an asset class, consider how yourassets are allocated. For example, if you'reinvesting in stocks, you could allocate acertain amount to large-cap stocks and adifferent percentage to stocks of smallercompanies. Or you might allocate based ongeography, putting some money in U.S.stocks and some in foreign companies. Bondinvestments might be allocated by variousmaturities, with some money in bonds thatmature quickly and some in longer-termbonds.

Monitoring your retirementportfolio

Even if you've chosen an asset allocation,market forces may quickly begin to tweak it.For example, if stock prices go up, you mayeventually find yourself with a greaterpercentage of stocks in your retirementportfolio than you want. If they go down, youmight worry that you won't be able to reachyour retirement goals. The same is true forbonds and other investments.

Do you have a strategy for dealing with thosechanges? Of course you'll probably want totake a look at your individual investments, butyou'll also want to think about your assetallocation. Just like your initial investingstrategy, your game plan for fine-tuning yourretirement portfolio periodically should reflectyour investing personality.

Even if you're happy with your assetallocation, remember that your circumstanceswill change over time. Those changes mayaffect how well your investments match yourretirement goals. At a minimum, you shouldperiodically review the reasons for your initialchoices to make sure they're still valid. Also,some investments, such as mutual funds, mayactually change over time; make sure they'restill a good fit.

Asset allocation anddiversification don'tguarantee a profit or insureagainst a loss. All investinginvolves risk, including thepotential loss of principal,and there can be noguarantee that any investingstrategy will be successful.


Disclosure Information -- Important -- Please Review

Christian Financial CreditUnion

Roberto Rizza, CRPC®Financial Advisor

CUSO Financial Services, LP18441 Utica Road

Roseville, MI [email protected]

586-445-3651

June 27, 2013Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2013

*Non-deposit investment products and services are offered through CUSO Financial Services, L.P. (“CFS”),a registered broker-dealer (Member FINRA/SIPC) and SEC Registered Investment Advisor. Productsoffered through CFS: are not NCUA/NCUSIF or otherwise federally insured, are not guarantees orobligations of the credit union, and may involve investment risk including possible loss of principal.Investment Representatives are registered through CFS. Christian Financial Credit Union has contractedwith CFS to make non-deposit investment products and services available to credit union members.

For specific tax advice, please consult a qualified tax professional.

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