Educated
For retirement plan participants
Volume 18, Issue 1, 2015
Find the right fit
for your retirement
investments.
mybmoretirement.com
Six ways to make the most of your retirement savings
Investing for retirement is a smart way to save for
the future. Your retirement may last for decades and
making regular deposits into a retirement plan can
help you build the wealth you’ll need to live the
retirement lifestyle you want. Here are six things
you can do to help make the most of your savings.
1. Understand your investments
Use this Savings
Planner to see
if you’re on track
to meeting your
goals or if you
have a retirement
shortfall.
There are many types of investments, and each has
pluses and minuses. Investments fall into three
main categories, or asset classes — stocks, bonds
and cash equivalents. The more you know about
your investment choices, the better equipped
you’ll be to select the ones that are right for you.
2. Allocate your assets based
on your needs
The way you divide your money among stocks, bonds
and cash is known as asset allocation. The asset
allocation you decide on should depend on your goals,
time horizon and risk tolerance.
For example, if you want to be more conservative
with risk, and you’re not comfortable with increases
and decreases in the stock market, you might invest
more of your money in bonds and cash equivalents
and less in stocks. Typically, younger investors — who
have more time to ride out the ups and downs in
the market — invest more in stocks than in the other
asset classes.
However, keep in mind, even the most conservative
investor should invest a certain percentage in stocks. In
light of today’s longer life expectancies, you could be
looking at a retirement that is several decades long. To
make your money last over this extended period, your
retirement account will need some growth investments.
For help estimating your ideal asset allocation given
your goals, time frame and risk tolerance, use the Asset
Allocation Planner found on mybmoretirement.com
in the Learning Center under Calculators.
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3. Make sure to diversify
The goal of diversification is to minimize the risk of
losing value in your investments. When you diversify,
you invest in different types of assets — so if one
goes down, others may go up.
Mutual funds, like those found in your retirement plan,
are designed for diversification. Each one invests in a
large number of securities. For example, a stock fund
usually invests in hundreds of different stocks. In
addition, asset allocation can help you diversify by
spreading your money among stocks, bonds and cash.
If the stock market goes down, the bond and cash
investments may help preserve value.
You can be even more diversified if you:
•Choose different types of stock funds: Large-cap
funds invest only in large companies; small-cap
funds focus on smaller firms; and growth funds
invest in companies that are growing rapidly.
• Go global with international funds that invest
in foreign company stocks and bonds.
• Select both government and corporate bond funds.
4. Rebalance your asset allocation
from time to time
When it comes to your asset allocation, it can be
easy to “set it and forget it,” especially when you’re
investing automatically into a retirement plan or an
IRA. But, over time, as the value of your investments
changes, your asset allocation can change too.
For example, you may start with an asset allocation of
60% in stocks, 30% in bonds and 10% in cash. If the
stock market has a good run, your stock allocation
could grow to, say, 70%, while your bonds decrease to
25% and your cash to 5%. At 70%, the stock allocation
may expose you to more risk than you’re comfortable
with. To rebalance, or get your asset allocation back to
a place that reflects your goals and risk tolerance, you
would sell some of the stocks and transfer that money
into bonds or cash.
% of asset classes
To learn more about investing during volatile times, see
Six Reasons to Stay the Course found in the Learning
Center’s Resource Library under Investment basics.
Asset allocation
after a stock
market gain
Starting asset
allocation
Stocks
Bonds
Cash
Your asset allocation is likely to change over time.
Rebalancing sets it back to where it was before.
Asset allocation funds, such as target retirement date
funds, rebalance for you. Look for the article about
target date funds in this issue.
5. Stay on track with your plan
Most investors need stocks and other growth
investments to keep their money growing faster than
the rate of inflation. But, it’s easy to become worried
when the market fluctuates and the value of your
investments goes down. Keep in mind, you only lose
money if you sell your investment — and it is very
difficult to know when to invest or when not to invest.
If you hold it and continue to invest when prices are
low, you can actually buy more than you would when
prices are high.
For example, let’s say you invest $100 every month into
a stock fund. Because the price per share changes every
day, some months your $100 will buy more shares
(when the price is low) and other months it will buy
fewer shares (when the price is high). But over time, it
averages out. Investing the same amount every month
(or per paycheck) is known as dollar-cost averaging. 1 It
helps you to stay on course and build your savings,
despite what may be happening in the market.
6. Start investing as soon as you can
The sooner you start investing, the more you can save.
Consider the following story of Maria and Brian,2
co-workers who are the same age. Maria started
contributing $100 a month to her retirement plan
when she was 25 years old. She stopped contributing
after 15 years but kept the money in the account
where it continued to earn a 6% annual rate of return
until she retired at age 65.
Brian waited until age 35 to start making contributions.
He also saved $100 a month and earned a 6% annual
rate of return. Brian kept contributing for 30 years until
age 65.
Maria contributed $18,000 less than Brian but ended
up with over $29,000 more — simply because she
started earlier.
When you start early and give your money time
to grow, like Maria did, you can benefit from
compounding. Simply put, compounding is earning
a return on your investment’s return, like earning
interest on your interest. Over time, compounding
can make a big difference in your account.
Compound interest
arises when interest is
added to the principal
of a deposit or loan, so
that, from that moment
on, the interest that
has been added also
earns interest.
Wikipedia, The Free
Encyclopedia
How much can you afford to contribute? Use the
Salary Deferral —Take-Home Pay Calculator to
see how your take-home pay would be affected
by changes in your contribution level. Go to
mybmoretirement.com and select Calculators
in the Learning Center.
1
Dollar-cost averaging does not ensure a profit nor guarantee
against loss. Investors should consider their financial ability to
continue their purchases through periods of low price levels.
2
T his hypothetical illustration is for demonstration purposes
only. It is not based on the rate of return of any particular
investment and does not include costs incurred under any
particular investment. It is also not intended to serve as
financial advice or as a primary basis for our investment
decisions. Taxes are generally due upon withdrawal. Your
results will be different.
Accumulation over time
$140K
Maria
Contribution: $18,000
Accumulation: $130,499
$120K
$80K
$40K
Brian
Contribution: $36,000
Accumulation: $100,954
$0K
Age 25
35
45
55
65
Wherever you are. Wherever you are going.
2
Understanding the investment choices in your retirement plan
Most of the investment options in your retirement plan are likely mutual funds and cash-type investments.
And you probably have several of them to choose from. Understanding what each investment aims
for — and the risks involved — can help you choose the ones that are best for you.
Mutual funds pool money from a number
of people into one fund. Professional fund
managers then invest that money into a
wide range of stocks, bonds or other
investments. Mutual funds are federally
regulated by the U.S. Securities and
Exchange Commission, which has put laws
in place to protect mutual fund investors.
With a mutual fund, you don’t have to worry
about deciding when to buy or sell a specific
investment, because the professional
managers make those decisions.
Stock funds invest in a large number
of stocks. Your retirement plan may include
many stock fund choices, and most of them
probably aim to provide growth. Here’s how:
Each share of a stock represents ownership
in the company that issued it. Stock prices
fluctuate based on how well the company is
doing. So, if the company is very successful,
the stock price could rise considerably, which
would translate into a good return for the
mutual fund that owns it.
However, stock prices also tend to rise or fall
more than bond prices. (This is known as
volatility.) Although the risk can be greater
with stocks, your money has the potential
to grow faster than the rate of inflation.
Bond funds invest in a large number
of bonds. Like stock funds, you probably
have several of them to choose from in your
retirement plan. Investors usually own bond
funds for their reliable interest payments
and relative safety. Some bond funds also
aim to provide growth.
Bonds are issued by companies or
governments as a way to borrow money.
When a mutual fund buys a bond, it receives
a fixed interest amount (usually every six
months) plus, if the fund manager holds
the bond until it matures, the fund will get
its original investment (the principal) back.
The manager could also sell the bond
before it matures if the price has risen — and generate additional return (or growth)
for the mutual fund.
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What are the risks? If something goes wrong
at the issuing company, it might not be able
to pay the interest or principal. This is credit
risk, and to minimize it, mutual fund
managers carefully evaluate a company
before they buy its bonds. They also use
a variety of strategies to mitigate interest
rate risk, or the risk that bond prices will
decline if interest rates rise.
Balanced funds are a type of mutual fund
that invests in a mix of the three main
asset classes — stocks, bonds and cash
equivalents. These funds may provide you
with a mixture of safety, income and growth.
Cash and equivalents, such as
Treasury bills and certificates of deposit,
can provide income and safety. They
typically have a fixed rate of return, and
there is much less risk of losing your
investment. However, the interest rate
you earn is usually very low. That’s why it’s
important to supplement these investments
with others that provide growth.
Stable value investment options are one
of the most common capital preservation
alternatives available in retirement
savings plans. These options have many
different names, such as Stable Principal
Fund, Capital Preservation Fund, GIC Fund,
Stable Value Fund, etc. While the names,
legal structure and investments within a
stable value option may vary, generally
stable value options invest in contracts
issued by banks and insurance companies
and permit participants to access funds
without principal risk or penalty. Stable
value options focus on preserving the
invested capital (or principal) of participants
while providing liquidity and steady positive
returns that have exceeded money market
investments over time.1
Is a target date retirement
fund right for you?
If you’re a hands-off type of investor who
prefers to leave the asset allocation decisions
to the professionals, a target date retirement
fund may be the right choice for you.
Target date retirement funds are
professionally built and managed based
on the number of years until retirement.
The name of each fund includes the target
retirement year; for example, BMO Target
Retirement 2020 is designed for investors
who plan to retire in 2020 — or a year close
to it. If there’s no fund with the exact year
you plan to retire, your best move is to
choose a fund with a target date closest
to your retirement year.
The main advantage of a target date fund
is its dynamic asset allocation. The fund
managers gradually adjust the investments
in the fund over time to make it less risky
and preserve capital as the retirement year
approaches. This helps ensure your money
will be there when you need it.
To help you decide whether a target date
fund is right for you, here’s an overview
of the pros and cons.
Pros:
•Easy to use. Simply select the fund that
most closely aligns with the year you plan
to retire.
•Broad diversification. Target date funds
may invest in a range of stocks, bonds
and cash equivalents, as well as
alternative investments. To see what a
particular fund invests in, you can check
the “portfolio holdings” or “asset mix,”
typically found on the fund’s fact sheet.
•Glide path investing. Target date funds
aim to regulate risk by adjusting the asset
allocation along a “glide path.” The glide
path is how the fund changes its mix of
stocks, bonds and cash over time as it
approaches the target date. As the years
pass, the fund managers shift the asset
allocation toward safer investments.
This measure of protection makes the
fund less vulnerable to a large stock
market decline as the year of your
retirement — when you’ll need to start
using your savings — gets closer. Read
more about the benefits of investment
along a glide path below.
What is the benefit
to investing along
a glide path?
•Automatic rebalancing. The
fund’s managers periodically buy
and sell investments in order to
make sure the fund’s asset allocation remains where it should be
based on the glide path.
To help you better understand
a glide path’s benefits, we’ve
included a sample illustration
below. Notice how this fund’s
allocation to stocks gets
progressively smaller while the
allocation to fixed income assets
increases as the retirement date
draws closer. In this way, as the
target date nears, the fund is less
vulnerable to a stock market
decline since it holds a greater
degree of investments that offer
safety and a fixed rate of return.
•Flexible end dates. Some target
date funds continue to manage
the assets for years after the
target date. After all, you’re likely
to live a long time beyond your
retirement date.
Cons:
•May not reflect your risk
tolerance. Some target date
funds are more conservative or
aggressive than others. And it’s
not always easy for you to tell
where the fund lies on the risk
spectrum. Often, a fund’s fact
sheet will include an objective
and a list of holdings, which
can provide clues into how the
fund invests.
In plain English
Want to know more? Here are some terms related to this issue of
Educated Investor.
In addition, the fund in this
example continues to adjust the
asset allocation up until 10 years
past retirement, when the glide
path flattens out. This can be a
valuable feature in a target date
fund because you are likely to
enjoy 20 to 30 years in retirement.
It will be important to have some
growth investments, like stocks,
to keep your money growing — and to help make sure you have
the lifestyle you want during
those years.
•Costs can vary. It’s a good
idea to compare the fees of
any mutual fund with other
investment options before you
invest. You can see the fees in
the prospectus.
•May only hold funds offered by
one fund family. Some target
date funds invest in other mutual
funds but are limited to owning
funds from just one fund family.
These types of target date funds
might not offer you as much
diversification as target date
funds that can invest in a broader
range of mutual funds. Again,
you can check the fact sheet to
see what the fund invests in.
1
ast performance is not a guarantee
P
of future results.
You should consider the Fund’s
investment objectives, risk, charges
and expenses carefully before investing.
For a prospectus, which contains this
and other information about the BMO
Funds, call 1-800-236-3863. Please read
it carefully before investing.
BMO Investment Distributors, LLC is
the distributor of the BMO Funds.
Member FINRA/SIPC.
Money market
Allocation (%)
Fixed income
50% equities
30% equities
0
40+
35
30
25
20
15
Years to retirement
10
5
0
5
10
Equities
15
20
25
30
Years past retirement
INVESTMENT RISK — The possibility of losing some or all of your
original investment. Each type of investment has its own risks.
We’ve listed out some of the more common types below.
INFLATION RISK — The risk that inflation will erode the purchasing
power of an investment. This happens if the rate of inflation is
higher than the rate of return on your investment.
RISK TOLERANCE
The degree of risk you’re comfortable with. Conservative investors
typically have a low risk tolerance and don’t want to chance losing
much of their money. More aggressive investors are willing to take
more risk in exchange for a potentially higher rate of return.
40
20
RATE OF INFLATION — The rate at which the general level of prices
for goods and services is rising. When inflation increases, you lose
some of the purchasing power of your money, meaning you can’t
buy as much with one dollar as you could before.
MARKET RISK — The risk that an investment’s value will decrease
due to factors that affect the overall market. For example, a major
event could cause a temporary decline in the stock market that
affects all stocks.
80
70% equities
LARGE-CAP, MID-CAP AND SMALL-CAP — One way to classify
companies trading on the stock exchange based on their size
(the total value of all shares of stock of the company). Large-cap
companies are the biggest companies, usually those with a market
capitalization of more than $10 billion. Mid-cap companies have
a market cap between $2 billion and $10 billion. Small caps are
typically smaller than $2 billion. Market capitalization is the number
of shares a company has trading (shares outstanding) multiplied by
the stock price per share.
CREDIT RISK — The possibility that a company will be unable
to pay bondholders interest and/or principal on its bonds. If a
company encounters financial difficulties, it may not be able to
make these payments.
Sample glide path
60
ASSET ALLOCATION FUNDS — Funds that invest in some combination
of stocks, bonds, cash equivalents and alternative investments.
Some asset allocation funds keep the mix steady while others vary
the mix depending on the outlook for the markets or based on a
specified end date for the fund. Target date funds are a type of asset
allocation fund.
INTEREST RATE RISK — The risk that an investment’s value will
change due to a change in interest rates. For example, bond prices
tend to decline as interest rates rise.
All investments involve risk,
including the possible loss of
principal.
100
ALTERNATIVE INVESTMENTS — Any investment that is not one of
the three traditional asset types (stocks, bonds and cash). They
include precious metals, hedge funds, managed futures, real estate,
commodities and derivatives contracts. Although some alternative
investments are difficult to understand and can carry a lot of risk,
others are designed to help everyday investors minimize investment
risk and volatility.
35
40+
Wherever you are. Wherever you are going.
4
Volatility checkup
Few aspects of your retirement goals are as nerve-wracking — and potentially valuedestructive — as volatility. Taking time to understand what volatility is and preparing for it is
critical to investment success, as your response to volatility can often have a larger effect
than you think. Yet volatility might not call for any adjustment, especially if it is already
addressed in a sound retirement investment plan and monitored through regular checkups.
Know your enemy
Lowell Yura, CFA, ASA
Managing Director,
Head of Multi-Asset
Solutions,
BMO Global Asset
Management
2010 S&P 500 Closing Prices
(USD)
1300
Volatility is the speed and magnitude of changes in
value, up and down, of any investment. Volatility has
several causes: surprises in economic indicators like
unemployment, housing, tax rates and interest rates,
changes in policy or unexpected geopolitical
events — all of these can cause ripples in the market
and affect any individual stock, bond or other
investment in your retirement portfolio.
With so many contributors to volatility, drawdowns
(some quite significant) are not unusual, and you
need to prepare for them. A stock, for example, may
rise and fall several times a year. Drawdowns happen
on a larger scale too — look no further than the S&P
500’s brief drops in 2011, 2010 and 2009. Simply put,
prices vary: brace yourself for slumps.
1250
1200
1150
1100
1050
1000
1/1/10
4/1/10
7/1/10
10/1/10
1/1/11
Reality check
The first way to guard against volatility is to do a
reality check. Remember best practices and use the
Savings Planner at mybmoretirement.com. There
you can set your desired retirement income and
At BMO, we’re ready to help with any of your financial needs.
Access your retirement plan account online
at mybmoretirement.com.
• View your account balances and activity
• View your personal rate of return
• View investment performance and price information
• Access tools and calculators
• View account statements and request forms
Speak to a BMO Retirement Services Specialist
24 hours a day by calling 1-800-858-3829, option 2.
Use the My BMO Retirement Line (automated telephone
system) by calling 1-800-858-3829, option 1.
• Receive your account balance
• Receive investment performance and price information
• Request account statements and forms
Contact a BMO Distribution and Retirement Planning
Specialist at 1-800-858-3829, option 1 for financial planning
or rollover assistance.
We invite your comments and suggestions for topics to include in future issues.
Please write to: Educated Investor, 111 East Kilbourn Avenue, MC-3-WM, Milwaukee, WI 53202
5
Educated
Go to mybmoretirement.com
to read Educated Investor online.
work backward to see what you need to contribute today to earn
the returns that will get you there.
Next, consider your tolerance for risk. Does shooting for your
required return expose you to risk you’re not comfortable with?
If you have doubts, it’s a good idea to take another look at your
savings contributions and your desired income after retirement
and make sure these match up.
Asset-weighted and average total and
investor returns (Trailing through December 31, 2013)
Average 10-yr
Total Return
(%)
Asset-Weighted Returns
gap (%)
10-yr Investor
Return (%)
U.S. Equity
8.18
6.52
-1.66
Sector equity
9.46
6.32
-3.14
Balanced
6.93
4.81
-2.12
International
equity
8.77
5.76
-3.01
Taxable bond
5.39
3.15
-2.24
Think rationally
Municipal
3.53
1.65
-1.88
It’s not easy to do, but it’s crucial to stay rational during times of
volatility. Prospect theory, a theory about how risk affects decision
making, reminds us that since we attach more emotional value to
losses than to gains — even when they’re equal — we often make
irrational decisions in moments of uncertainty. 1 Deep down, this
makes sense: losses feel greater than gains because they cause
a lot more stress.
Alternative
0.96
-1.15
-2.11
All funds
7.30
4.81
-2.49
Also, remember that younger investors have more time to reverse
the effects of a market downturn than older investors, whose
larger balances may not have the same horizon needed to recover.
For this reason, BMO’s Target Date Funds actually decrease your
risk through active asset allocation, helping you make this
adjustment as you approach retirement.
But panic doesn’t make for smart investing. In 2012, investors
withdrew more than $93 trillion from U.S. equities, only to watch
them return more than 35% in 2013. Such poor timing is partly
why annualized returns for the average fund investor trailed those
of the average fund by 2.49% from 2002 to 2013. 2 To put that in
perspective, an initial investment of $10,000 that trails average
fund returns by 2.49% annually will miss out on more than $25,800
over 25 years. 3 Don’t try to time the market: focus on the long term.
It’s key to think in a balanced way about both losses and gains:
keep your cool. And more importantly, know BMO’s Target Date
SOURCE: Morningstar
Funds are actively managed by seasoned investment
professionals. Their mix of assets is designed to reduce risk
as you near your target retirement date, seeking to reduce the
role volatility can play in your portfolio.
Weather the storm
While there is no cure for volatility, you can guard against its
negative effects. It’s important to understand any drawdown in
context — as a slump already prepared for in a wise retirement
savings plan. Keeping up your contributions, examining your risk
tolerance, and staying objective and fixed on your goals during
turbulent times can help you weather the storm.
Prospect theory was created by Daniel Kahneman and Amos Tversky and first formulated in their 1979 research paper “Prospect Theory: An Analysis of Decision under
Risk.” Kahneman won the 2002 Nobel Prize in Economics for his work combining psychological research and economic science.
2
Source: Morningstar.
3
Numbers based on annualized average 10-year total returns (7.30%) and 10-year investor returns (4.81%) projected over a 25-year period.
1
Educated Investor is published periodically by BMO Retirement Services and distributed free of charge as a service to our clients. Although carefully verified, data is not
guaranteed as to accuracy or completeness. BMO Retirement Services and its affiliates cannot be held responsible for any direct or incidental loss incurred by applying
any of the information in this publication. Consult your tax and financial advisor.
The term “Educated Investor” is used by BMO under a co-existence agreement with Precision Information, LLC (PI). The contents of this publication are not in any way
connected to, affiliated with, related to, or endorsed by PI, or connected with PI’s rights related to its ownership of “Educated Investor” federal trademark and service
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United States Department of Treasury Regulation Circular 230 requires that we notify you that, with respect to any statements regarding tax matters made herein, including
any attachments, (1) nothing herein was intended or written to be used, and cannot be used by you, to avoid tax penalties; and (2) nothing contained herein was intended
or written to be used, and cannot be used, or referred to in any marketing or promotional materials. Further, to the extent any tax statement or tax advice is made herein,
BMO Harris Bank N.A. does not and will not impose any limitation on disclosure of the tax treatment or tax structure of any transactions to which such tax statement or tax
advice relates. BMO Harris Bank N.A. does not provide legal advice to clients. You should review your particular circumstances with your independent legal and tax advisors.
BMO Retirement Services is a part of BMO Global Asset Management and a division of the BMO Harris Bank N.A., offering products and services through various affiliates of
BMO Financial Group.
BMO Global Asset Management is the brand name for various affiliated entities of BMO Financial Group that provide investment management, retirement, and trust and
custody services. Certain of the products and services offered under the brand name BMO Global Asset Management are designed specifically for various categories of
investors in a number of different countries and regions and may not be available to all investors. Those products and services are only offered to such investors in those
countries and regions in accordance with applicable laws and regulations. BMO Financial Group is a service mark of Bank of Montreal (BMO).
Investment products are: NOT FDIC INSURED — NO BANK GUARANTEE — MAY LOSE VALUE.
© 2015 BMO Financial Corp. (1/15)
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