Build: Begin Construction. Choose the right investments to achieve your goals.
The Basic Building Blocks
Your profit-sharing plan offers a broad array of choices in three main types of investments. For details on each, please see Laying a Solid Foundation for Your Future. Following are brief descriptions of the three types.
Money Market and Stable Investments
- Short-term, high quality investments like Treasury Bills, CDs, and Guaranteed Investment Contracts.
- Considered the lowest risk category.
- Offer lower return potential and can carry inflation risk — the risk that your returns won't keep up with rising prices.
Bonds
- A lot like money market and stable investments — they are also forms of debt, but with longer time periods.
- Bonds generally carry higher risk than money market and stable investments, and offer higher potential returns.
- Bonds are subject to interest rate risk: if interest rates go up higher than the interest rate set on a bond, the value of the bond will probably go down.
Stocks
- Historically have had the greatest potential for higher returns over the long term.
- Considered the riskiest of the investments offered in your retirement plan.
- Stocks are subject to market risk — the market as a whole could lose value.
- Stocks also entail business risk — the corporation you've invested in may not do well.
The Advantages of Mutual Funds
Your profit-sharing plan offers a number of mutual fund choices for two primary reasons.
- Diversification. Most mutual funds are diversified and spread potential risk among anywhere from a few to a few hundred different securities. Most individual investors would find it impossible to build a portfolio of individual securities as diverse as a mutual fund.
- Professional Money Management. With mutual funds, you don't have to become an expert on stocks, bonds or other individual securities. The mutual fund manager typically works with a team of analysts to select securities that support the fund's investment objectives.
Next Steps
If you haven't done so already, you should:
You can then customize your model portfolio by accessing your profit sharing account online.
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