SPECIAL REPORT Diversification Managing risk with common sense

The fine printhas a point Diversifying through asset The fine printon investment-related allocation materials often states that all investing involves some degree of risk. Historically, market conditions that Diversification isone way to manage cause one asset category to do well those risks. It’s a concept that involves often cause another category to have spreading investment dollars among a average or poor returns. Consider the variety of options. following scenario: By taking such an approach, a Win some, lose some participant could be less affected by A participant has a that losses in any one investment; while is equally invested in bonds and a A participant’s approach to any losses that are incurred may be short-term investment like a money offset by gains in another investment. market. As interest rates rise, the value investing for the future in Of course, as the fine print says, this of the bonds in the portfolio drops PSERS Defined Contribution approach doesn’t guarantee better accordingly, and the portfolio “loses” performance or protect against loss in money. The participant’s loss, however, (DC) Plan investment options declining markets. is offset by an increase in value on the money market investments, as can be similar to the approach Understanding performance these two types of investments react used for other life decisions: An investment portfolio often consists differently to the same external forces of a combination of the three main – the change in interest rates. Use common sense, and, as - , bonds, and This example is based on the principle money market instruments. Diversifying the saying goes, “Don’t put of “asset allocation,” which takes a portfolio involves identifying diversification a step further by investments in segments of each asset all your eggs in one basket.” spreading investments among and category that may perform differently within different asset categories. Many This sums up the concept of under different market conditions. participants use asset allocation to diversification. A “rain or shine” example diversify their investments; however, a diversified portfolio doesn’t necessarily Let’s say hypothetically that an need to be divided among different individual invests in the of asset classes (as described in the “rain two companies – one manufactures or shine” example). raincoats, the other makes sunglasses. A rainy month brings great profits for For a more detailed explanation of this the raincoat company, but profits slide concept, see the Special Report on during sunny months. So, the investor Asset Allocation. could help manage those highs and lows by investing in something that reacts differently to the same condition, the weather: sunglasses. As this simplified example shows, a diversified portfolio can be made up This information is provided by entirely of investments in one asset the Voya family of companies for class; in this case, both investments financial education and awareness are stocks. purposes to all PSERS members and participants in PSERS Class T-G, Class T-H, and Class DC and does not constitute financial advice. Asset allocation through target date investments Asset Allocation vs. Diversification An alternative to asset allocation Asset allocation is often confused with among the available investment diversification, which can be summed options is to invest in a target up as “not putting all your eggs in one date investment based on your basket.” While both help to manage risk, estimated normal retirement asset allocation takes the concept a step age. Target date investments further. Asset allocation involves dividing a are professionally managed and portfolio among and within different asset periodically adjust with a specific classes (such as stocks, bonds and money target retirement date in mind. market instruments). Diversification only Professional investment managers involves distributing the assets among invest your money in a mix of funds a variety of investments, but doesn’t With PSERS, across a variety of asset classes necessarily have to involve different to create a diversified investment asset classes. you’re on portfolio, guided by the number of years until retirement. This gives your way! a participant the ability to diversify within a single investment . Spreading your eggs among different baskets No one expects participants to predict fluctuating interest rates or study the operations of each company and predict stock prices. Some people seek guidance from a financial professional to review the investment option choices that are available in an employer-sponsored plan like your PSERS Defined Contribution Plan.

For PSERS members in Class T-G, Class T-H, and Class DC, you can view your PSERS DC Plan online through PSERS MSS Portal. Go to your PSERS DC Plan account, then visit the Investments section to learn more about the investment options available in the PSERS DC Plan and their historical performance.

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