A Dose of Investment Strategy

When I walk down the supplement aisle of a pharmacy, I’m completely overwhelmed. There are so many different choices of vitamins and supplements, brands, doses, and prices. Is a daily multivitamin good enough to cover all my bases or do I need to mix in other supplements specific to me?

I think that choosing investments can have a similar feeling for many people, especially those new to investing.  In this blog post, we will show you how a few different investment strategies will be listed within your BPAS Account and talk about how each strategy functions.

Target Date Funds and Target Risk Funds: The “Multi-Vitamin” 

As someone new to vitamins, maybe I want to get something that is a one-size-fits-all, so I choose the multi-vitamin. The benefit of a multi-vitamins is that they are easy and will broadly cover most people’s needs.

With investments, Target Date and Target Risk Funds are similar to multi-vitamins in the sense that they may be a suitable option for the majority of investors.

Target Date Funds are based on the year in which you expect to retire. For example, a young person with 40 years until retirement may choose a 2060 or 2065 Target Retirement Fund. These funds are dynamic and will change over time without any input from the investor. They are easy, hands-off options. In early years, target date funds invest a large potion in stocks and other equity investments to take advantage of growth. As the investor nears retirement, the fund will decrease equity holdings and shift to a heavier portion in fixed income investments to focus on income and protection, rather than growth. If you are new to investing, a target date fund may be a more accessible approach for you.

Some accounts offer Target Risk Funds instead of Target Date funds. Target Risk Funds are often organized by the level of risk or percentage of equity and fixed income. While there are many different names, they typically refer to Conservative, Moderate, or Aggressive. Or, they may refer to their intended goal, such as Growth, Income or Capital Preservation. Unlike the target date funds which become more conservative over time, Target Risk Funds stay at the stated investment objective. If you choose an aggressive fund, for example, it will remain aggressive. You decide if or when to move to a different target risk fund along your journey as your risk tolerance or overall investing strategy changes.

Just like a multi-vitamin, it’s important to review the underlying components and ensure that a Target Date or Target Risk investment meets your overall investing strategy. If not, consider how you can adjust accordingly, by either selecting a different target investment or by creating your own allocation.

Your Custom Asset Allocation:  The “Mix and Match”

Let’s go back to the vitamin analogy for a moment. Maybe you are in-tune with your body and know which vitamins and supplements you need you based on your diet, age, and medical needs. You cater the vitamins to your exact needs–selecting individual vitamins and supplements and taking the appropriate dose of each. Instead of one multi-vitamin, you might be taking a few pills and supplementing them with your dietary choices.

This approach is similar to the investing of a custom Asset Allocation. With Asset Allocation, you may invest in different funds that are very specific to your investment needs and risk profile. This strategy gives you the most flexibility in catering your investments to your goals.

With Asset Allocation, your objective is to choose different investment categories and determine what percentage of your portfolio should be allocated to these different categories (also called asset classes).

Investment categories may include Large, Mid, or Small Cap Stock; Foreign Stock; Short or Long-Term Bonds; Money Market; and many others. Each category has different risk and return expectations. A Money Market, for example is very low risk. So, while there may not be significant annual returns, your principal remains secure. On the other hand, foreign stock may be high risk so you may see significant changes in the performance, both positive and negative, at any given time.

The key to Asset Allocation is diversification. Fully investing in one category could lead to too much or too little risk. The secret is to be invested in multiple categories based on your risk tolerance and goals. Our on-line risk questionnaire can help you plan an Asset Allocation strategy.

Just as you know you should review what’s in those vitamins before purchasing, both on your own and with your doctor or pharmacist, the same applies to your investment options! Review the fund fact sheets and prospectuses before investing. And, be sure to consult with your financial advisor for additional information. Here’s to a healthy and wealthy new you.