Role Playing: Is Your Retirement Plan in on the Act?

Role Playing: Is your retirement plan in on the act?

When choosing funds for your retirement plan, it’s important to remember that each investment type plays a specific role. Ideally, you want investments that don’t react the same way when market conditions change.

Having a mix of stocks, bonds and cash can help lessen risk to your savings when the stock market moves up and down. For example, when interest rates rise, stocks may perform well but bond prices usually go down. Having all of one kind of investment can mean big wins at times, but also big losses if the market changes.

Mixing it up, or diversifying your account, helps lower your overall risk. It does this by balancing out your investments. However, it cannot protect against loss when the market goes down. Knowing the role each investment type plays can help you make informed choices.

Stock Funds—Role: Designed to Grow

Stock funds may benefit you when individual companies and the economy in general do well. There are several types of stock funds, each defined by the types of companies they buy.

Stock fund characteristics

Market size – The number of shares a company offers identifies its size.

  • Large-cap – >$12.2B
  • Mid-cap – $4.2B to $12.2B
  • Small-cap – < $4.2B

Investing style – How investors expect a stock to perform

  • Growth – high-growth potential.
  • Value – strong but under-valued or out of favor.
  • Index – tracks a benchmark index, like the S&P 500.1
  • Growth and income – stocks that do or do not pay dividends.

Country – Where the companies are located

  • International – developed markets, such as Europe or Japan.
  • Global – U.S., developed foreign markets; sometimes emerging markets.
  • Emerging – developing markets, such as Russia or South Korea.
  • Regional/single-country – such as Latin America.

Sector – Investments from a specific type of industry

  • Utilities/Technology, etc. – stocks in the specific industry.
  • Real Estate – real estate investment trusts include income-producing properties, such as apartments or shopping centers.

Bonds Funds—Role: Seek income or stability

Bonds are built from money you “loan” to an organization, such as a corporation or a government. The organization agrees to repay the loan with interest within a set timeframe. Bond fund prices typically change less than stock funds. This can potentially add stability to your savings.

Bond fund types

  • Treasury – Issued by the federal government, these bonds fund government programs and the national debt.
  • Municipal – Issued by state and city governments, these bonds fund roads, schools, sewers and other public works projects.
  • Corporate – Issued by public and private business, these bonds fund projects that help their business grow. Government bond fund shares are not guaranteed by the U.S. Government.

Money market fundsRole: Pursue preservation

Money markets hold investments, such as U.S. Treasury bills, that mature in less than one year. In addition to preserving capital, money market funds help you maintain liquidity with convenient access to your cash.

Combine the right cast for your retirement plan

Knowing the role stocks, bonds and money market funds play can help you put your portfolio picture together. This may give you a better chance of helping lessen risk and save for the kind of retirement you want.

You can choose each of the fund types individually and put together your own mix.

Or, you can choose a fund that automatically includes a mix of stock, bond and money market investments. Based on your tolerance for risk and investing profile, we can help you find the pre-mixed fund that’s right for you.

1The S&P 500 Index is composed of 500 selected common stocks most of which are listed on the New York Stock Exchange. It is not an investment product available for purchase.

Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results. Diversification does not ensure against loss in a declining market. The opinions expressed are those of our investment professionals, and are no guarantee of the future performance of any American Century Investments® portfolio. This information is not intended to serve as investment advice; it is for educational purposes only.