Investment Basics

2016

KNOW YOUR

RETIREMENT PLANS

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What is Investing?

• Investing is not a “get rich quick scheme”

• Investing is not “gambling”

• Investing is putting your money to work for you

Where are you investing your money?

• In Investment vehicles such as Stocks, bonds, mutual funds, real estate, cash

equivalent investments

• Each investment vehicle has a positive and a negative aspect to them

• Investing is becoming a necessity – you’ll need to save and invest over your

entire career to have financial security in retirement

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Investing Uncertainty

Finance and economics

• Not predictable sciences

• Professionals (economists, academics, analysts, fund managers,

individual investors) often have conflicting theories and ideas about

how/why the market works

» Theories are opinions; no right or wrong

• Your goal – to be an informed investor; match your investment mix with

your investment style

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Why Investing Works?

The magic of compounding – The Snowball Effect

Initial Investment

Year 1

Year 2

Year 3

$10,000

$10,600

$11,236

$11,910

invested @ 6%

+$600

+$636

+$674

• The process of generating earnings on

an asset’s invested earnings

• It requires re-investment of earnings and

time

invested @ 6%

invested @ 6%

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Dollar Cost Averaging

• Investing a fixed amount of money over a period of time

• If market goes up, investments cost more so buy less

• If market goes down, investments are a lower cost so buy more

• Investment appreciates over time

Contribution Investment

Amount Share Price Shares Purchased

1 $200 $50 4

2 $200 $40 5

3 $200 $20 10

4 $200 $40 5

Totals $800 $150 24

Average share price of the four contributions: $150 ÷ 4 = $37.50

Participant’s cost per share: $800 ÷ 24 = $33.33

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What is an Index?

An imaginary portfolio of securities representing a particular portion of that

market (i.e. Large US Stocks, Small US Stocks, Bonds, etc.)

Common Indexes

» S & P 500 – Combined stock value of 500 large US Companies

» Dow Jones Industrial Average – the price-weighted average of 30 US large company stocks

» NASDAQ – an index of more than 3,000 stocks that trade on the Nasdaq exchange, some of

whom are technology and biotech giants

» The Barclays Capital US Aggregate Bond Index – tracks performance of US investment grade

bonds

Why are Indexes important?

» They provide a baseline to measure the performance of your portfolio

» They provide information on how the “markets” are doing

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Index Funds vs Actively Managed Funds

Index Funds

» Portfolio constructed to match or track a market index; Invests in the same securities

as the Index it follows

» On track to perform as the Index performs

» Provides broad market exposure, low operating expenses and low portfolio turnover

Actively Managed Funds

» Utilizes a manager or team of managers to actively manage a fund’s portfolio

» Manager(s) rely on analytical research, forecasts and their own judgement and

experience in knowing what securities to buy, hold or sell.

» They try to outperform their related Index and are more expensive to operate; higher

expense ratios

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Diversification

• What is diversification?

» Managing risk by spreading your money among different types of

investments in your portfolio

• How does diversification help you?

» Reduces your overall investment risk

» Increases potential for consistent gains

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One Fundamental Principal

Diversify, Diversify, Diversify

• Among & Within Asset Classes

• Other Investment Styles

» Growth vs. Value

Stocks

• Large Cap

• Small Cap

• Mid Cap

• Foreign

Bonds

• Short Term

• Intermediate Term

Cash

• Money Market

• US Treasuries

• Stable Value

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Growth Stock Funds vs Value Stock Funds Two fundamental approaches with stock investing

Growth Stock Funds

» Growth investors seek companies that offer strong earnings growth

» Growth stock funds are:

Higher priced that broader market stocks

Higher earnings growth record

More volatile than broader market stocks

Value Stock Funds

» Value investors look for stocks that are either new and yet to be recognized by investors or have

fallen out of favor but have good fundamentals.

» Value stock funds are:

Lower priced than broader market stocks

Priced below similar companies in the same industry

Carry somewhat less risk than the broader market stocks

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Types of Investments Investments in the Plans

Cash Equivalents Cash Equivalent Funds

• Safest type

• Gains interest only

• Little to no risk

Mass Mutual SAGIC

Bonds Bond Funds:

• Called fixed income securities Dodge & Cox Income Fund

• Founded in debt; lending

money to a company or

government and they agree to

pay you interest on money lent

and eventually pay you back

the entire amount

BlackRock Inflation Protected Bond

Fund

• Provide safety and stability –

lower risk, lower potential

returns; slower growth

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Types of Investments Investments in the Plans

Stocks Large US Stock Funds:

• Become part owner of the company entitles you to receive profits (dividends)

• Volatile – price fluctuates in value on a daily basis

• High potential return – must accept risk associated with owning stock

Dodge & Cox Stock

Vanguard 500 Index

Delaware US Growth Instl

Mid-Cap US Stock Funds: Vanguard Mid Cap Index Adm

BlackRock US Opportunities Instl

Small US Stock Funds: Vanguard Strategic Small Cap Equity

Inv

Foreign Large Stock Funds: Ivy International Core Equity I

Brandes International Equity I

Oppenheimer International Growth I

World Allocation Funds: First Eagle Global I

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Types of Investments Investments in the AIP

Real Estate Real Estate Funds:

• Real Estate Investment Trust (REIT)

• A fund that invests in real estate through property or mortgages

• Funds trade on major exchanges like stock funds

• Considered similar to stock funds

• Provides investors with diversification, regular income streams and long-term capital appreciation

Nuveen Real Estate Securities I

Global Real Estate Funds: Voya Global Real Estate I

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Asset Class Winners and Losers

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• Age

• Current Income

• Financial Status

• Personality

• Personal Circumstances

General Rule

• The shorter your time horizon, the more conservative you should be

• With a longer time horizon, the more aggressive you should be

Know Yourself

Investment Influences

Risk

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Take the Investor Profile Quiz

• 10 easy questions

• Determines the type of investor you are currently

• Suggests an investment strategy, called a Model Portfolio, which follows your

profile and is appropriate for you

• Offered online, by phone with a Benefit Services Rep, or in Enrollment Booklet

» Analyzes your feelings about putting your money into higher risk investments vs lower

risk investments

High risk investments are typically stocks or stock mutual funds. Over the long term

they have shown to provide growth on your money.

Bonds and cash are the lower risk investments. They provide stability but slower

growth.

» Assists you in evaluating what percentage to put in higher risk (growth) investments

and in lower risk (slow growing) investments

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Investment Balance between Safety and Risk

What is the best balance for you today? Tomorrow?

Cash (Equivalent) & Bonds

Risk Safety

Balance risk with several types of investments (Stocks & Bonds)

Stocks (Large, Small,

Mid, Foreign)

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Create Your Portfolio

Types of…

• Stock Mutual Funds

» Ownership in companies

» Large, mid, small-cap, foreign

» Value, blend & growth

» Values fluctuate

» Higher risk but provides growth over time

• Bond Mutual Funds

» Obligations of corporations & governments

» Pay regular interest payments

» Stable; slower growth; lower risk

• Capital Preservation Mutual Funds

» Money markets, CDs, T-Bills

» Short term

Highest return Lowest return

Highest return Lowest return

Highest return Lowest return

Risk-o-Meter

Stocks

Bonds

Capital

Preservation

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Investment options to create your own portfolio

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Vanguard Target Date Retirement Funds

• One investment choice made up of several Vanguard index mutual

funds

» Very diversified portfolios for each Target year

• Professionally managed by Vanguard

• You choose by the year you want to retire (range of years)

• Portfolio automatically adjusts from aggressive (stocks funds) to more

conservative (bonds and cash equivalents) as you get closer to

retirement year(s)

» Reducing risk automatically over time

• Appropriate to put 100% of your money in a Target fund

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Vanguard Target Date Retirement Funds

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How do Vanguard Target Date Funds rate?

• One of the top 5 in an industry study of Target Date Funds

• Provides good returns and diversified investment mix over time

• Low expenses are a hallmark for Vanguard; therefore higher returns for

investors less for fund management fees.

*Kiplinger Fund Watch. “Best Target-Date Funds for Retirement Savers” by

Nellie S. Huang 2015

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Monitor your portfolio annually

• How has your portfolio performed?

• Are you ok with the amount/percentage in high risk investments or low risk

investments?

» If not, make changes over time – move money from high risk to low risk investments

• Remember, you can’t time the market! No one can predict when investments

will go up or down.

Keep with your strategy until you don’t feel comfortable with it.

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Monitor your portfolio annually

• Remember, saving for retirement is over a long time - stocks historically

provide growth of money over the long term.

• Educate yourself on investing

» Use millimanbenefits.com

» Read financial magazines

» Search the internet

• Review your investments

» Use millimanbenefits.com to research investments in your SRP and Deferred Comp

Plan

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Additional Resources

• www.millimanbenefits.com

» Benefits Services Hotline 1.866.767.1212

• www.money.cnn.com

• www.bloomberg.com

• www.aaii.com (American Association of Individual Investors (AAII)

» Phone Number: 1.800.428.2244

• www.forbes.com – Forbes is a biweekly newspaper focusing on business & investing

• www.ici.org – Learn about mutual fund investing

• www.fundalarm.com – tools & commentary on mutual funds

• www.morningstar.com – Morningstar analyzes & rates investments (direct link on Milliman website)

• Barron’s – a weekly newspaper that reviews the stock market

• The Wall Street Journal – newspaper focusing on business & investing

Questions?

Thank You!