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Step Three
Match your risk profile
Choosing your investments
Match your risk profile to your investment choices
Understanding asset classes
The investment choices available through your retirement savings plan fall into a combination of three broad asset classes. Asset classes are categories of investments that exhibit similar characteristics and may behave similarly in the marketplace. In general, different types of investments react differently to the same market conditions. Understanding how the three main types of asset classes (stocks, bonds, and cash equivalents) work will help you form the basis for developing a long-term investment strategy that corresponds to your risk tolerance. Here are brief definitions of each asset class with their historical performance: Stocks are shares of ownership in a company. Over the past 10 years, stocks have returned an average annual return of about 6.8%. 1 Bonds represent the borrowing of money by a corporation, government, or other entity. Bonds have returned an average annual return of about 4.6% over the past 10 years. 2 Cash Equivalents seek to maintain the value of your investments. Over the past 10 years, cash equivalents have returned an average annual return of 1.3%. 3 Asset allocation is how you divide your money among the different types of investments according to your individual goals, risk tolerance, and investment horizon. Each of the three main asset classes—stocks, bonds, and cash equivalents—have different levels of risk and return, so each will behave differently over time. A portfolio is a grouping of financial assets that are held directly by investors and/or may be managed by professionals. Diversification is a risk management technique that mixes a wide variety of investments within a portfolio. The goal of this technique is to potentially use the positive performance of some investments to neutralize the negative performance of others. For example, when stock prices rise, bond prices often decline. A diversified portfolio with different styles of investments generally, on average, yield higher returns and pose a lower risk than any individual investment within a portfolio. Diversification does not assure a profit or protect against market loss. Asset allocation and diversification*
* Asset allocation and diversification do not assure or guarantee better performance and cannot eliminate the risk of investment losses. All investments involve risk, including loss of principal and there is no guarantee of profits. Investors should carefully consider their objectives, risk tolerance, and time horizon before investing. 1 Based on average annual total returns of the S&P 500 ® Index over 10 years as of September 30, 2015. 2 Based on average annual total returns of the Barclays Capital Aggregate Bond Index over 10 years as of September 30, 2015. 3 Based on average annual total returns of Citigroup 3-month U.S. Treasury Bill Index over 10 years as of September 30, 2015.
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