Money Market          Bonds              Stocks

These asset classes are often grouped together into different indices or funds:

Index Funds
Simply put, these group together a certain asset class (most commonly stocks or bonds) in an attempt to diversify your risk within that asset class. For example, the S&P 500 groups together 500 of the largest U.S. based companies. Its return is thought to be representative of the stock market as a whole. As such, when you buy the S&P 500 you buy a little piece of all of the 500 companies – and voila! - you have a diversified stock portfolio without paying a lot to a Portfolio manager to try and “beat the market” , when in reality, they rarely do.

Mutual Funds
Investing in a mutual fund allows you to invest in an array of stocks and bonds, so you can lower your overall risk through diversification (while one may drop in value, for example, another may do extraordinarily well). These funds are actively “managed” – meaning you pay a fee to invest in the fund and the Portfolio Manager (the person in charge of the fund) tries to beat the market for you (and by beat the market we mean earn you a higher return than you would have gotten in an index fund).

ETFs (Exchange Traded Funds)
In contrast to mutual funds, ETFs are not managed by a portfolio manager (so they usually have NO Fee). Rather, ETFs electronically simulate the performance of a well-known index fund.

Your Asset Allocation
A general rule of thumb is that the higher the potential return of an investment, the greater the risk of losing money. Generally for retirement accounts, the younger you are, the more risk you can tolerate, or in other words—stocks should take up a greater percentage of your portfolio. But remember—this is specific to your retirement portfolio as it is considered to have a long-term investment horizon.

The concept of what percentage of your portfolio should be made of stocks, bonds and other investments is called asset allocation. Your individual asset allocation should be driven by answers to questions like:

•How old are you?
•When do you expect to need your investment money? (If you’re 25, you won’t need it for 40 years!)
•Do you have enough other savings that you won’t need to dip into your retirement portfolio?
•What is your risk tolerance? (i.e., while “on average” you will make money in the long run, how tolerant are you of volatile performance—some years your investments will do well, some years they won’t. )

Take-away: Your mix of investments (your asset allocation) is just as important as your actual investments. You want a mix of assets that are both risky (high rewards) and conservative (so you don’t lose all your money).

As a general rule of thumb, you can subtract your age from 120 and the resulting number is how much of your Retirement Portfolio should be invested in stocks. Click here to see a chart that demonstrates "The Magic Rule of Thumb equation."

Take our quiz, so you are both investment ready—and cocktail party conversation ready! If you’re uncertain of some of the terms, check out our Investing Basics.
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Figure out how much you can afford to contribute every month/year. LV’s Budget Tool can help you do this. Your goal is to contribute the full $5,000 each year for an IRA, which is about $415 each month. Don’t fret. If you can’t handle that much, contribute as much as you can—a minimum of $50. (That’s only the cost of two nice dinners or nights out.)
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If you feel comfortable enough to contribute the full $5,000 at once, then we recommend doing so on January 1st in order to maximize the tax benefit. Decide if this approach is for you. Action Time: 1 minute

If you will contribute every month, set up automatic payments or recurring calendar reminders. If you will contribute once per year, set up reminders for January 1st of every year. (Plus, LearnVest plans to send you a reminder in a week to make sure you’ve contributed.)
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