Building an Investment Strategy

deferred compensation plan overview

Building an investment strategy that meets your risk Understand Your tolerance and investment objectives is critical to Investment Options successfully preparing for retirement. The Deferred Compensation Plan includes There are three key steps to building an investment investment options that fall within three broad asset strategy: classes: Understand your investment options.  Cash equivalents (stable value and money market funds), Determine the investment mix (asset allocation) that will best help you achieve  Bond funds, and

your goals.  Stock funds.

Select an investment path to fulﬁ ll your asset These asset classes have different risk and return allocation objective. characteristics, as shown in the chart below.

Risk and Return Characteristics of the Three Main Asset Classes

Higher Potential Risk Higher Potential Return Descriptions of these asset classes are provided on page 25.

Stock Funds

Bond Funds RETURN

Cash Equivalents

Lower Potential Risk RISK Lower Potential Return

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ASSET CLASSES AVAILABLE UNDER THE WRS DEFERRED COMPENSATION PLAN

CASH EQUIVALENTS: MONEY MARKET FUND STOCK (EQUITY) FUNDS: LARGE-CAP, AND STABLE VALUE FUND INTERNATIONAL/GLOBAL, MID-CAP, AND SMALL-CAP6

Cash equivalents typically invest with the objective of Large-Cap Stock Funds providing stable income with very little capital risk. Large-capitalization funds generally invest in the Money market funds invest in commercial paper, stock of companies with market values of greater notes, and other instruments with short durations. than $10 billion. Stock investors receive dividends Stable value funds may invest in a variety of if they are paid and share in the gain or loss if the investment contracts issued by major fi nancial price of the stock goes up or down. institutions and typically have longer durations than International Stock Funds/Global Stock Funds investments in money market funds. International stock funds generally invest in the stock BOND (FIXED INCOME) FUNDS of companies located outside the United States. Bond funds typically invest with the objective of Global stock funds generally invest in the stock of providing stable income with lower capital risk. companies both inside and outside the United States. Bond funds can consist of debt obligations of the Mid-Cap Stock Funds federal government, agencies, or corporations, pools of mortgages, and various other debt-related Mid-capitalization funds generally invest in the instruments. stock of companies with market values in the $2 billion to $10 billion range. REAL RETURN FUNDS A multi-asset class strategy that is designed to Small-Cap Stock Funds protect investors against rising infl ation. It may Small-capitalization funds generally invest in invest in Treasury Infl ation Protection Securities companies with a market value below $2 billion. (TIPS), fi xed income, commodities, stocks, real estate investment trusts and cash.

BALANCED FUNDS

Balanced funds invest in both stocks and bonds.

You can obtain more detailed information about the available investments by reviewing Investment Options At a Glance, the fund fact sheets, and/or the fund prospectus. In addition, WRS regularly holds seminars that cover a variety of pre-retirement planning topics, including investment information.

6 Source: Lipper, a Reuters company.

Determine the Asset allocation rather than by speciﬁ c fund selections or Allocation That Will “market timing” (trying to time the purchase or sale Best Help You Achieve of investments on the basis of market conditions).7 Your Goals The amount of risk and expected return in your 457 How you allocate your money among the asset Plan account are determined by the percentage classes in the 457 Plan is one of the most important of your account you invest in each broad asset investment decisions you will make. This is called category. For example, if you invest all of your

“asset allocation.” Studies show more than 90% of 7 Gary P. Brinson, Brian D. Singer, and Gilbert L. Beebower, a long-term investor’s returns are driven by asset “Determinants of Portfolio Performance II: An Update,” Financial Analysts Journal, May/June 1991.

25 deferred compensation plan overview

account in bond funds, your account can be The “pre-mixed” path allows you to be less involved described as conservative, with low risk and low in the details of managing your retirement assets potential return. because a professional investment manager is making most of your investment decisions for By diversifying your 457 Plan account among the you. Pre-mixed funds contain more than one asset three main asset classes — as opposed to investing class — meaning they are a pre-mix of stock, your account in only one asset class — you can take bond and/or cash equivalent funds. Investing in a advantage of the fact that different asset classes pre-mixed fund can be a convenient way to achieve do not always react in the same way to market diversification. A professional investment manager conditions. When one asset class is doing poorly, selects a variety of funds from different asset it is possible a different asset class may be doing classes and regularly “rebalances” your portfolio, well. Combining asset classes can be a good way to making all asset allocation and fund decisions for manage the risk of your total portfolio. you. The pre-mixed funds offered in the WRS 457 Select An Investment Plan are known as “target date portfolios”. Path to Fulfill Your Asset Target date portfolios are designed to provide Allocation Objective you with a comprehensive investment solution in Under the Deferred Compensation Plan, there are one fund with an investment mix that will change two ways to fulﬁ ll your asset allocation objective: throughout each stage of your life. The year in the name of the target date portfolio represents the  You can invest in a well-diversiﬁ ed “pre-mixed” approximate year when you plan to retire. Each portfolio, or target date portfolio is broadly diversified and  You can control the allocation yourself by designed for the time horizon indicated by the selecting from the “mix-your-own” fund choices. year in the fund’s name. You select a target date portfolio based on the year you expect to retire, THE PRE-MIXED PATH

The Deferred Compensation Plan Pre-Mixed Fund Options

This relative risk/return meter Relative Risk/Return Meter offers one way to gauge the risk and return potential of the pre- e Target Date t Dat Targ mixed fund options in the Deferred rge et D Ta 2030 at 25 2 e Compensation Plan. e 20 03 at 5 Ta D rg t e e t rg 0 2 D a 2 0 a T 0 4 t 2 0 e

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t 5 2 e t e 1 0 g 0 4 D r 2 5 a a t T e

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Lower Potential Risk/Return Higher Potential Risk/Return

This relative risk/return meter is illustrative only. It is not comparable to the risk/return meter for the mix-your-own funds or any other risk/return meter.

26 deferred compensation plan overview

and it will gradually and automatically become more represent a range of asset classes and investment conservative as you move toward your retirement management styles. You can obtain prospectus year. As time passes, the managers of the target information for these funds on the Web site, and date portfolios gradually shift the investment performance information can be found in the back mix from a greater concentration of higher-risk pocket of this guide. investments (namely stock funds) to a greater The risk tolerance quiz on page 22 is designed to concentration of lower-risk investments (bond funds help you determine the general asset allocation that and money market instruments). is right for you on the basis of your risk tolerance You can obtain information about the target date and investment horizon. portfolios offered in the Plan on the Web site, and The sample portfolios in the following pages show performance information can be found in the back how the mix-your-own funds can be combined to pocket of this guide. create a diversified portfolio. As you review them, you may want to have the results of your risk THE MIX-YOUR-OWN PATH tolerance quiz at hand. The “mix-your-own” approach is appropriate if If you do not want to create your own portfolio, you you want control: You review and select your may want to consider the pre-mixed path. investments, and manage your account on an ongoing basis. The 457 Plan offers you the  opportunity to create a custom asset allocation from a menu of available fund options. The funds

The Deferred Compensation Plan Mix-Your-Own Approach

This relative risk/return meter Relative Risk/Return Meter offers one way to gauge the risk and return potential of the mix- your-own fund options in the 457 Large et Co. al Ass Sto In Plan. Re ck ter na d S ti n to on o c a B k l

C i le o d . - b e S a u S t l t iz S a o c e V k

y t S a e e t o l n k l r c o C k a

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Lower Potential Risk/Return Higher Potential Risk/Return

This relative risk/return meter is illustrative only. It is not comparable to the risk/return meter for the pre-mixed funds or any other risk/return meter.

27 deferred compensation plan overview

SAMPLE PORTFOLIOS

The following sample portfolios are intended to show you different ways to build a portfolio. Keep in mind the investment mixes shown here are only to give you an idea of possible asset allocations and are not intended as advice for your speciﬁ c situation.

These sample portfolios range from conservative (lower potential risk/return) to aggressive (higher potential risk/return). However, you might be more conservative or aggressive than any of these sample portfolios.

In addition, note small- and mid-cap stock funds are combined as a single investment in the sample portfolios. These investments have similar risk and return proﬁ les. You could invest in either one or both of these funds to achieve roughly the same diversiﬁ cation opportunities shown in the sample portfolios.

Conservative Risk/Return Sample Portfolio Moderate Risk/Return Sample Portfolio

Real Asset Cash Equivalent Real Asset Cash Equivalent 10% 10% 12% 5% Large-Cap St 15% Large-Cap Stock 25%

Small-/Mid- Stock 5% Small-/Mid-Cap Core Bonds International Stock 55% Stock Core Bonds International 7% 5% 40% Stock 11%

The Conservative Risk Sample Portfolio invests 25% The Moderate Risk Sample Portfolio invests 43% in in stock funds (both domestic and international) 65% stock funds (both domestic and international), 45% in core bonds and cash equivalent funds, and 10% in core bonds and cash equivalent funds, and 12% in real asset funds (a multi-asset class investment in real asset funds (a multi-asset class investment consisting of real assets such as TIPS, commodities, consisting of real assets such as TIPS, commodities, REITS, as well as stocks and bonds). This portfolio REITS, as well as stocks and bonds). This portfolio is designed for investors who seek a total return with is designed for investors whose primary goal is emphasis on income and low risk. investment stability including income and long-term return potential and who are willing to tolerate moderate levels of volatility.

28 deferred compensation plan overview

Moderately Aggressive Risk/Return Aggressive Risk/Return Sample Portfolio Sample Portfolio Large-Cap Real Asset Large-Cap Real Asset 14% Stock 15% Stock 30% 40%

Core Bonds Core Bonds 15% 32% Small-/Mid-Ca Stock International International 9% Small-/Mid-Cap Stock Stock Stock 15% 18% 12%

The Moderately Aggressive Risk Sample Portfolio The Aggressive Risk Sample Portfolio invests 70% in invests 54% in stock funds (both domestic stock funds (both domestic and international), 15% in and international), 32% in core bond funds and core bond funds and 15% in real asset funds (a multi- 14% in real asset funds (a multi-asset class asset class investment consisting of real assets investment consisting of real assets such as TIPS, such as TIPS, commodities, REITS, as well as stocks commodities, REITS, as well as stocks and bonds). and bonds). This portfolio is designed for investors This portfolio is designed for long term investors who are primarily seeking growth and higher return whose primary goal is moderate investment growth potential and are willing to tolerate higher levels of potential through capital appreciation and income volatility. and who are willing to tolerate moderately higher levels of volatility.

Note: An independent investment consultant designed these sample asset allocations using generally accepted modern portfolio theory and principles designed to generate portfolios that offer an efﬁ cient trade-off between expected returns and expected volatility. Please consider the investment objectives, risks, fees, and expenses of each fund carefully before investing.

Selection of Specific Funds

You can further diversify your portfolio within each to be underpriced relative to their underlying broad asset class on the basis of the particular value. A growth manager typically purchases funds you select. For the Deferred Compensation stock in companies believed to have earnings Plan, this step deals primarily with the stock portion growth prospects that are better than the of your portfolio. As you select speciﬁ c funds, you market as a whole. A core or blend manager may want to consider the following: typically uses both value and growth investing characteristics.  Manager Style — Manager style can provide another basis for diversiﬁ cation of the stock  Capitalization — Capitalization is a major portion of your portfolio. A value manager factor in certain funds’ investment selection typically purchases stock in companies believed process. A company’s capitalization is equal to

29 deferred compensation plan overview

its share price times the total number of shares INVEST WITH A LONG-TERM PERSPECTIVE outstanding. (See the box at the top of page Whether you choose the “mix your own” or the 25 for more information.) Large-capitalization “pre-mixed” portfolio path, it’s a good idea to keep (“large-cap”) stock funds typically invest in large, your long-term investment goals in mind. Stock and established companies with a history of paying bond funds frequently rise and fall in value. You dividends. Mid-cap stock funds typically invest may be tempted to move your money out of such in medium-sized companies that have survived funds if the value of your portfolio declines, but their start-up stage but are not as established keep your investment horizon in mind. If you are as large-cap companies. Small-cap stock in your 20s, 30s, or 40s, you have many years of funds typically invest in new or recently formed investing ahead of you, and you can afford to take companies that don’t have a long track record. some risk in exchange for the possibility of higher Small-cap and mid-cap stocks have historically long-term returns. Even if you are in your late 50s provided higher returns than large-cap stocks, or early 60s, the majority of your 457 Plan account but typically do not pay dividends and are will probably be invested for another 10 or even characterized by a higher level of volatility. 20 years, which is usually plenty of time to ride  Actively Managed Funds vs. Index Funds — out market declines. Keep your long-term goals in Active managers try to beat market indices mind when the stock and bond markets experience (like the S&P 500) through their selection of volatility. speciﬁ c investments. Index managers copy a market index and make no attempt to beat the BE WARY OF BEING TOO CAUTIOUS

market. This is also referred to as indexing or Although it may make sense to invest a portion of passive management. Index funds usually have your money in cash equivalents, having all of your lower fund operating expenses than similar funds money there simply because you perceive those with active management. investments as “safe” may shortchange you in the Remember, the information in this guide is not long run. Consider this: If you invest everything intended as investment advice. Its purpose is in a money market account that returns 3% and to help you understand the investment options infl ation is 4%, your money will actually lose 1% of available through the WRS 457 Plan. Your its spending power over that period. fi nancial strategy and investment choices REVIEW YOUR ASSET are entirely your own and should refl ect your ALLOCATION REGULARLY personal needs and circumstances. You might need to change your asset allocation The Wyoming Retirement System and its staff when your long-term goals change or switch target cannot provide investment advice. For more date portfolios if your retirement date changes. information about how to effectively invest Your life and your fi nancial situation change as time given your particular situation, you may wish passes, so be sure to review your investment mix to consult a professional fi nancial adviser. and your long-term goals on a regular basis. You may want to consult a fi nancial adviser before you make changes to your allocation.