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401(k) Savings - Investments & Investing

Understanding Risk

When it comes to saving and investing, there's no way to avoid risk. There's the risk of losing money if the market goes down, which it will from time to time. There's the risk of playing it too safe and not beating inflation. There's the risk of not saving enough or not saving at all - and not having the money you'll need for your future. And there are other types of risk as well. Here are some ways you can reduce risk:

  • Diversify. Put your money into a number of different types of investment options with different types of investment assets. It helps reduce risk because your money is spread out across different types of investments. It's a good idea to diversify your money across cash equivalents, bonds and stocks. And when investing in a specific asset class, for example, stocks, it's often smart to include different types of stocks in your portfolio.
  • Invest for the long term. The market will have ups and downs, but if you invest wisely and leave your investments to grow, you're likely to get a higher return.
  • Be aware of being too cautious. It may make sense for you to have a portion of your assets in cash equivalent investment options. But remember that if you invest all your contributions in a "safe" investment option that earns a 6% annual return, and inflation is 4%, inflation will erode much of the gains your investment earned.
  • Change your investments when you change your long-term goals. Your financial situation changes at different stages of your life. Be sure to review your investment mix and your long-term goals on a regular basis and make changes only when necessary.

Diversify with Asset Allocation

The way you distribute your investment dollars among and within different kinds of assets (cash equivalents, bonds and stocks) is called asset allocation. It can help you reduce investment risk. Keep these points in mind when choosing your asset allocation:

  • Invest for your risk tolerance and savings goals. If you have low risk tolerance, as explained in the "Developing Your Portfolio" section you may want to invest more heavily in conservative cash equivalents and invest some of your money in bonds. If you are willing to take more risk, you may want to invest a higher percentage of your assets in stock investment options.
  • Know your time frame. If you'll need your savings soon, you may want to invest in more conservative investment options. But if you won't need your savings for many years, you may want to take more risk and invest in more aggressive investment options for potentially greater returns.

Here's a quick overview of risk and return:

Risk is the possibility for gain or loss on your investment.
Return is the actual gain or loss on your investment, usually expressed as an annual percentage rate.

Types of investment options available

Choosing the right investment mix is an important step toward reaching your dreams. The Plan offers a number of different investment types, or "asset classes."

Here's a brief overview of asset classes:

  • Cash equivalents or "stable value" investments. These include bank savings deposit accounts and money market funds 4 which invest in Treasury bills and short-term securities. They are designed to hold steady in value over time and are low-risk investments. While the options in this asset class are designed to be relatively stable and have a place in many portfolios, their returns are generally low and may not outpace inflation.1
  • Bonds or "fixed income" investments. These include both corporate and government bonds. Although past performance is not a guarantee of future results, history shows that in the long run, bond investment options grow more slowly and steadily than stock investment options and generally offer lower potential returns. Bond investment options can be a useful part of a portfolio - they help diversify and tone down an otherwise aggressive stock-oriented portfolio and can help more conservative portfolios stay ahead of inflation.
  • Stocks or "equity" investments. These represent ownership in a company. Stocks are considered the riskiest investment asset class. However, they also have historically had the highest potential returns over time. For long-term investors, stocks are often a significant component of their portfolios.

Major types of domestic stocks:

Large-cap stocks. These are stocks issued by companies with market capitalization of typically more than $5 billion. Many large-cap companies are called blue-chip companies, a term that comes from the highest valued chips on a poker table. They are well-established companies, such as GE, Ford, and IBM and frequently pay steady dividends. While their vast size and maturity typically makes them less responsive to market changes and often slower growing, their stability typically can make them well-positioned to weather inevitable economic downturns.

Mid-cap stocks. These stocks are issued by companies with market capitalization typically between $1 billion and $5 billion. Historically, large- and small-cap stocks have received more attention than mid-cap stocks. In many cases, however, mid-cap companies are established yet responsive, with the potential for continued, healthy earnings growth. Their larger capitalization base tends to make them less risky than smaller-cap stocks, though typically with slightly lower returns.

Small-cap stocks.2 These stocks are issued by companies with market capitalization typically below $1 billion. Microsoft was once a small-cap stock and that type of rapid acceleration in earnings and growth is what small-cap investors are looking for but are not always able to find. Small-cap stocks can be highly volatile, but they are often viewed as companies that are on the cutting edge of their industries. Many small-cap companies effectively respond to market changes; they may also have difficulty weathering economic downturns.

Investing Without Borders

International stocks.3 These are stocks issued by companies outside of the United States. Whether you invest in the stock of a Japanese auto manufacturer, a German design firm, or in more volatile emerging markets, international stocks can be risky. Political climates may change, and currency valuations may rise or fall. But international stocks may also give you the opportunity to diversify into young, dynamic markets that are early in their growth cycle. International stocks tend to have a high risk and return potential, and may also have a low or possibly negative correlation (moves in an opposite direction) with domestic stocks, adding portfolio diversification.

Stock Management Investment Styles
Growth, Value, and Core

Stock managers use different strategies to work toward their goals:

Growth style managers look for companies that are expected to generate higher-than- average earnings growth over time and reinvest gains back into the company instead of paying dividends to shareholders. Growth managers may also be willing to pay a premium price for the stock.

Value style managers look for companies they believe have strong growth and earnings potential but are currently underappreciated by or out-of-favor with the market.

A core management style combines both growth and value management strategies.

Active Verses Passive Management

Investment options can be actively managed or passively managed. Actively managed investment options try to surpass the total return of a particular benchmark index (for example, the S&P 500® Index); passively managed investment options try to track or match the total return of an index.

Actively managed investment options are run by a professional portfolio manager, typically with one or more analysts. The manager engages in regular in-depth research on the individual companies within a particular area of focus. A variety of research tools, financial analyses, and personal expertise are used to determine which securities to buy and sell. There is no guarantee that the portfolio manager will accomplish the goal of producing higher returns than the benchmark. Actively managed funds tend to have higher management fees than passively managed funds because you are paying the investment manager for his or her expertise and research in deciding which securities to buy or sell, as well as more frequent trading of securities than with a passively managed fund.

Passively managed or index investment options are designed to produce similar returns to those that investors would earn if they owned all the securities in a particular market index. They are called passively managed because the way an investor's money is invested is determined by the securities that are included in a particular index, not the discretion of a portfolio manager.

1 An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although money market funds seek to preserve the value of an investment at $1.00 per share, it is possible to lose money by investing in a money market fund.

2 Equity securities of companies with relatively small market capitalization may be more volatile than securities of larger, more established companies.

3 Foreign investments involve special risks, including currency fluctuations and political developments.

Please consider the investment objectives, risks, fees and expenses carefully before investing. For this and other important information, please obtain the mutual fund prospectuses and disclosure documents by visiting the Horizons Web site at www.countyla.com or by calling the Los Angeles County Service Center at (800) 947-0845. Read them carefully before investing.

Investment options are offered through mutual funds and separately managed institutional accounts and have been selected by the Plan Administrative Committee. Securities are offered through GWFS Equities, Inc., a Great-West Company and FINRA member firm.

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