INVESTMENT GUIDE INVESTMENT GUIDE Table of ConTenTs IntroductIon About Savings Plus ...................................................................... 1 How to Invest for Your retirement ........................................... 1 SectIon 1: Asset AllocAtIon two Key elements of Asset Allocation ..................................... 3 How Important is Asset Allocation? ......................................... 3 SectIon 2: InveStor TypeS Questionnaire ............................................................................... 5 Investor Profiles ............................................................................ 9 SectIon 3: BuIld Your PortfolIo Select a pre-built portfolio from a single Asset Allocation fund ................................................ 10 Build a customized portfolio using our core investment fund options .......................................... 11 Build a customized portfolio using the Brokerage Account ............................................................. 12 Savings Plus fund options ........................................................ 13 next Steps .................................................................................... 15 APPENDIX Asset categories ......................................................................... 17 Know Your Asset categories .................................................... 17 Management Style ..................................................................... 19 IndeX of terms ....................................................................................................... 21 INTRODUCTION About Savings Plus Savings Plus, the State of California’s 401(k) and 457 plans, is available to most State of California employees. These plans allow you to build a retirement savings account using automatic payroll deductions that are invested in options you select from the Savings Plus portfolio. You can set up your portfolio to position yourself to retire on your terms. Contributions to your account are considered deferred income, so you don’t pay taxes on it until you withdraw the funds, generally during retirement. Even if you expect to get a pension from CalPERS, CalSTRS or Social Security, it may not be enough for your retirement. Savings Plus helps fill the gap. The additional income you receive from your Savings Plus account can be one of the keys to your future financial security. How to Invest for Your retirement Participation in Savings Plus means you’re both a saver and an investor. Every investor is different and so are the ways you can invest. It’s important to consider your future and to understand what type of financial contributions you may make to support your retirement. This booklet provides information and a questionnaire to help you determine your Time Horizon, Risk Tolerance, and Investor Profile. When you consider your approach to retirement, it’s equally important to consider both the risks and the potential investment return. There are several ways to manage investment risks, including asset allocation. This guide will help you understand asset categories and how you can use them to create an asset allocation strategy that’s appropriate for you. The information in the Investment Guide helps you determine the investment mix that best fits your goals. Our websiteSPPforu.com also offers helpful investment information, including the most current performance data on our investment funds. Remember to read the fund fact sheet or prospectus for any investment you’re considering before you invest. Investing involves market risk including possible loss of principal. 1 SECTION 1 WhaT is asseT alloCaTion? Asset allocation is a strategy for managing risk. Simply put, it’s the process of diversifying your investment dollars across different asset categories. It enables you to increase your return potential while reducing your risk of losing money. Your willingness to accept a degree of risk will help you determine how to diversify your investments. two Key elements of Asset Allocation 1. Your Time horizon — The number of years your money remains invested. A shorter Time Horizon generally calls for a more conservative portfolio strategy. 2. Your Risk Tolerance — The amount of market fluctuations you’re willing to endure. An aggressive portfolio may not be suitable for an investor with a low Risk Tolerance, even if he or she has a long-term Time Horizon. Your answers to these two questions can help you determine an appropriate asset allocation strategy. • When will I need to use my retirement dollars? (Time Horizon) • How comfortable am I with market risk? (Risk Tolerance) How important is asset allocation to your investment success? Picking specific investments and deciding when to buy and sell them can have some impact on your overall return. However, a well-diversified portfolio may be the critical factor in determining how well your portfolio performs in the long run. Industry research has shown asset allocation accounts for approximately 90% of the Portfolio VolaTility variability of returns.* This means the asset category, not the specific investment or timing of the investment, is actually what Asset Allocation ≈ 90% drives the variability. For example, how much a portfolio allocates Security selection < 8% to small company options vs. large company options has much more impact than the Market timing < 2% choice of large company investment option A vs. large company investment option B. The use of diversification does not guarantee returns or insulate from potential losses in a declining market. * L. Randolph Hood, “Determinants of Portfolio Performance, 20 Years Later” Financial Analysts Journal, September/October 2005 3 SECTION 2 WhaT Type of inVesToR Are You? Now that you’ve learned the basics, it’s time to determine your investor Profile (what type of investor you are). Your Investor Profile is a combination of two factors: your Time horizon (the length of time you plan to stay invested) and Risk Tolerance (your willingness to tolerate possible investment losses). You can determine your Investor Profile by answering the following questionnaire.* Circle the number next to your answers and add up the point values at the end of each section. Time HorIzon 1) Time until Withdrawals When do you expect to begin using this money? 0 Two years or less from now 10 Nine to 11 years from now 3 Three to five years from now 11 12 years or more from now 7 Six to eight years from now 2) Time for Withdrawals Once you begin using this money, how long will it need to last? 0 I’m going to need it all at once 7 Between 11 to 19 years 2 Between one to five years 10 For 20 years or more 4 Between six to 10 years ToTal YouR Time hoRizon ScoRe: Question 1 point value ___________ + Question 2 point value ___________ † Your Time HorIzon Score = ___________ * Questionnaire provided by Ibbotson Associates, a leading authority on asset allocation within the financial services industry † If your Time Horizon score equals 0, this questionnaire should not be used for portfolio selection 5 POSSIBLE one YeaR gains and losses +$45,000 $140,000 +$38,000 $130,000 +$29,000 $120,000 +$21,000 +$15,000 $110,000 Portfolio Portfolio Portfolio Portfolio Portfolio a b C d e $100,000 -$8,000 $90,000 -$13,000 -$18,000 $80,000 -$24,000 -$28,000 Possible One Year Gain Possible One Year Loss Risk tolerAnce 1) Range of Returns/Potential Losses At the beginning of the year, you have $100,000 invested. The graph above shows the possible losses and potential best gains of various portfolios in any given year of different hypothetical portfolios over the long term. Select the portfolio below that you feel most comfortable with. 0 Portfolio A 12 Portfolio D 4 Portfolio B 17 Portfolio E 8 Portfolio C 2) Inflation In 1970, a candy bar cost around 15 cents. 40 years later, a candy bar costs around 90 cents due to inflation. To offset the impact of inflation, I will accept: 17 The highest level of risk, 5 Moderate risk. Returns slightly whereby returns may exceed inflation significantly exceed inflation 0 Lowest risk. Returns only keep 11 High risk. Returns moderately pace with inflation exceed inflation 3) Risk/Return Trade Off I understand that to meet my future income needs, I may need to take on additional risks in order to achieve potentially higher returns. 16 I’m comfortable with a greater 0 I’m more comfortable with lower than average amount of risk. risk investments. 8 I’m comfortable having a mix of both risky and less-risky investments. 6 4) Ability to Stay the Course All investment markets experience declines from time to time. If you have $100,000 in an account at what point of a decline in account value would you move your investments into more conservative options? 0 After losing 5% or $5,000 16 I would not sell any of my investments. 5 After losing 10% or $10,000 If my account declines in value, that 10 After losing 15% or $15,000 by itself is not a good reason to sell. 5) Loss Aversion I’m comfortable with investments that may frequently experience large declines in value if there’s a long-term potential for high returns. 0 Strongly disagree 12 Agree 5 Disagree 17 Strongly agree 9 Somewhat agree 6) Volatility Typically, accounts with lower returns also experience lower volatility or fluctuations in account value. Meanwhile, accounts with higher returns tend to have higher fluctuations or volatility in account value. Please consider four hypothetical accounts invested for 10 years. Given your attitude towards volatility, in which hypothetical account