Before you decide on a Savings Plan, educate yourself with the different asset classes and how they play an important role in determining your savings strategy.
Different Asset Classes
- Stocks are units of ownership in a company. When you buy stock you become a part owner, or “shareholder,” of the company. As an owner, you share in the company’s successes – and failures – through fluctuations in the value of the company’s stock. You may also receive dividends (payments) for a share of the company’s profits over time. Stock ownership exposes an investor to increased short-term risk when compared to the other major asset classes, but rewards that risk with a greater potential for long-term gains.
- Bonds work like “IOUs.” When governments or companies need money, they borrow it by issuing bonds. When you purchase a bond, you are lending money to that institution in return for interest payments. The bond represents a promise to pay back the original loan amount, plus interest, over a specified period of time (called the maturity date). Bonds are considered less potentially risky than stocks, but also generally provide a lower potential rate of return.
- Cash equivalents are conservative investments because they offer a relatively stable rate of return. With cash equivalents, such as money market mutual funds and certificates of deposits, your principal remains stable, while the interest rates fluctuate over time depending on market conditions. These investments offer the lowest exposure to market risk, but also have the lowest potential for return.
Why Does Each Option Represent Only a Single Asset Class?
Professional investors know that asset allocation decisions (deciding which percentage of your money to invest in each major asset class) are responsible for 90% or more of a portfolio’s returns. By combining the strength and stability of multiple investment managers (and their portfolios) in each asset class, the Siemens Investment Committee ensures a high-quality, well-rounded selection of portfolio building blocks, which allows participants to focus on their most important investment decision – asset allocation.
Why Is Asset Allocation So Important?
A hard truth of investing is that there is no reward without risk. You can increase your chances of coming out ahead by taking a measured amount of risk in exchange for the potential for higher earnings. That is usually achieved by mixing investments from the three major asset classes – stocks, bonds, and cash.
How Much Should I Put in Each Asset Class?
The answer to this question depends on two factors – your target year (when you expect to start using the money) and your risk profile (how aggressively you invest). A financial advisor can help you select an asset allocation that is appropriate for your situation.