How Should You Invest?

Once you know what rate of return you need to earn on your investments, you’re ready to determine how to invest your money so that you’re more likely to achieve that rate of return. There are basically three types of investments or “asset classes” to consider:

• stocks;
• bonds; and
• money market investments.

Which investments to choose

Here’s the basic rule of thumb: the higher the rate of return you want to target, the more heavily you may need to invest in stocks. Why? Because historically, stocks have delivered higher long-term results than any other investment type.

Say you invested $1,000 in 1972 in three different investment types—stocks, bonds and cash.
Over the past 30 years, that $1,000 investment in stocks would have grown the most, up to $31,918, compared to $12,933 in bonds and $6,908 in cash.*

But your stock investment would also have fluctuated the most from year to year—with annual returns ranging as high as 37.4% and as low as -26.5%. So the more time and the more patience you have, the better you can ride out the ups and downs of the stock market and benefit from its long-term growth potential. Of course, it’s important to remember that past performance does not guarantee future returns.

*Source: Calculated by Diversified Investment Advisors using information and data presented in Ibbotson Investment Analysis Software, ©2001 Ibbotson Associates, Inc. All rights reserved. Used with permission. Stocks are represented by the S&P 500 Index, an unmanaged index generally considered representative of the stock market. Bonds are represented by long-term (average maturity of 20 years) Government bonds. Cash is represented by 3-month U.S. Treasury Bills. Past performance does not guarantee future results.

Why diversification is so critical

Just because stocks have historically delivered the highest returns doesn’t mean you should invest all your retirement money in stocks. In general, different types of investments react differently to the same market conditions. For example, when stock prices are up, bond prices are often down—and vice versa. By spreading your money across the major investment types, you reduce the risk that a big drop in any one area could take your entire portfolio down with it.

For more tips on what funds you can choose and how to diversify your investment mix, go to to our “Invest Your Assets” section now.

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