Choosing Your Retirement Plan Investments
Choosing the investment mix for your retirement account is one of the most important steps you can take when it comes to preparing for a more secure retirement. That’s because selecting investments based on your long-term financial goals and objectives can help put you on the right path toward achieving your retirement income goals.
Many retirement savers find that asset allocation and diversification are important tools that help them make their investment choices more easily. Understanding these important investment concepts can help you to make informed choices for your retirement account.
Asset Allocation & Diversification
- Asset allocation is the process of investing your money in various types of investment asset classes (such as stocks, bonds, and stable value investments), thereby spreading out your investment risk.
- Diversification takes asset allocation one step further by investing in a variety of investments within those asset classes. (For example, it might involve investing in value and growth stocks—or investing in government and corporate bonds.)
Since different investments generally react differently to varying market conditions, asset allocation and diversification work in tandem to manage the risk you might otherwise face if you held only one type of investment in one asset class.
Please keep in mind, application of asset allocation and diversification concepts does not ensure a profit or protect against loss in a declining market. It is possible to lose money by investing in securities.
Investments Commonly Available to Retirement Plan Investors
Here are some of the types of investments that may be available to you through your retirement plan.1
Money Market Investments
- Money market funds invest in high-quality, short-term cash investments that mature in 13 months or less, as well as high-quality, fixed income securities with short maturities.
- These funds seek to maintain stable share prices and preserve principal.
- The investment risk with these funds is relatively low; the returns also tend to be low.
Stable Value Investments
- Stable value investment options strive to produce consistent returns over time.
- A core benefit of this investment type is a guarantee that accumulated balances will never decrease in value.2
- Bonds (also called fixed income investments) are IOUs issued by governments and corporations for money they receive from investors. Bond issuers promise to pay investors back on a specific date and make interest payments in the meantime.
- Corporate bonds are issued by private companies to raise capital. Municipal bonds are issued by state and local governments. U.S. Treasury notes and bonds are issued and backed by the federal government.
- When you choose a bond fund, you’re buying a share in an investment that purchases bonds.
- Stocks are shares of ownership in a corporation. A stock’s market value rises and falls, depending on its performance and future prospects.
- When you invest in a stock fund, your money is spread across several different stocks—meaning your earnings are not entirely dependent on the performance of a single stock.
- Because stock funds invest in many stocks, their price fluctuations are generally less severe than the volatility levels of individual stocks.
- The following table outlines several common types of stocks—broken down by size and investment strategy.
Type of Stock
- Stocks of companies with total market values of more than $10 billion.
- Tend to fluctuate less in price and are considered less-volatile, lower-risk investments than small- and mid-cap stocks.
- Stocks of companies with total market values of between $2 billion and $10 billion.
- Tend to fluctuate in price more than large-cap stocks, offering greater possible rewards, along with potentially greater risk.
- Stocks of companies with total market values of under $2 billion.
- Tend to fluctuate the most in price, offering the greatest potential reward and risk. Small-cap stocks have limited marketability and may be subject to more abrupt or erratic market movements than large-cap stocks.
- The stocks of large, small, or mid-sized companies.
- Offer the potential for above-average growth in sales and earnings.
- The stocks of large and mid-sized companies.
- Stocks that appear to be overlooked or out of favor with the investment community.
- Tend to pay dividends.
How to Choose Your Investments
There are three factors you may wish to consider when determining how much money you wish to put into each asset class:
- Your investor style
- Your years to retirement
- Your financial goals
Tips for Retirement Investors
Market conditions change on a regular basis. Sometimes markets move up; other times, they move down. That’s the basic premise of investing. But understanding your tolerance for risk will help you to develop a sound investment strategy. To learn more, visit Managing Risk in Your Retirement Plan Account.
Years to Retirement
Your asset allocation should also take into account the approximate number of years between now and your retirement. The more time you have until retirement, the more time you’ll have to ride out any downturns in the investment markets.
The final piece of the asset allocation puzzle involves the type of lifestyle you’d like to enjoy when you retire. For instance, if you’re hoping to travel the world, you may need a lot more retirement income than someone who wants to stay home with the grandchildren. This, in turn, means you may have to consider investing a bit more aggressively—which may help you reach your long-term financial goals.
Taking advantage of the benefits of asset allocation and diversification can go a long way toward helping you reach your retirement income objectives. Following are a few more tips to help you along the way:
- Invest Regularly: Doing so can help you automatically take advantage of dollar-cost averaging,3 which involves investing fixed amounts of dollars at periodic intervals.
- Invest for the Long Term: If you plan on retiring 30, 20 or even 10 years from now, you have time to ride out the inevitable market ups and downs without worrying too much about temporary fluctuations. Even at retirement, you should consider keeping a portion of your money in investments that have the potential to help your account grow.
For more insight on what kind of investments might work well for you in your retirement planning strategy, be sure to visit What Kind of Investor Am I? and How to Choose Investments.
Need Personal Assistance?
To learn more about selecting the investments that may best suit your long-term goals and objectives, contact a financial professional or a Prudential Retirement® Counselor.* Simply call 1-877-PRU-2100 toll free, Monday through Friday, from 8 a.m. to 6 p.m., ET and say "Retirement Counselor."
* Retirement Counselors are registered representatives of Prudential Investment Management Services, LLC (PIMS).
1Availability is based on your plan provisions.
All investing involves various risks, such as; fixed income (interest rate),default, small cap, international and sector ‐ including the possible loss of principal.
2 As a tradeoff for this guarantee, there may be restrictions regarding the amount of money that you may transfer out of this type of investment in a specified period of time—or there may be charges applied to transfer amounts that exceed a certain limit. Guarantees are based on the claims-paying ability of the issuing company.
3 Dollar-cost averaging and other periodic investment strategies do not assure a profit and do not protect against loss in declining markets. Such a program involves continuous investment in securities regardless of fluctuating price levels of such securities. Investors should consider their financial ability to continue their purchases through periods of low price levels.
An investment in the money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the portfolio.