Asset Allocation

Question 1

Asset Classes

Answer 1

Investments that have similar characteristics. The three main asset classes are stocks, bonds, and cash.

Question 2

Bond

Answer 2

A debt security, similar to an IOU. When you buy a bond, you are lending money to the issuer. In return for the loan, the issuer promises to pay you a specified rate of interest during the life of the bond and to repay the principal when it “matures,” or comes due.

Question 3

Index Fund

Answer 3

A type of mutual fund whose investment objective typically is to achieve approximately the same return as a particular market index, such as the Standard & Poor’s 500 Index, the Russell 2000 Index, or the Wilshire 5000 Total Market Index.

Question 4

Investment Adviser

Answer 4

An investment adviser is a firm or an individual that, for compensation, engages in the business of advising others as to the value of securities or as to the advisability of investing in, purchasing, or selling securities. An investment adviser can also be a firm or individual that, for compensation and as part of a regular business, issues analyses or reports concerning securities.

Question 5

Lifecycle Funds

Answer 5

A diversified mutual fund that automatically shifts towards a more conservative mix of investments as it approaches a particular year in the future, known as its “target date.” A lifecycle fund investor picks a fund with the right target date based on his or her particular investment goal. The managers of the fund then make all decisions about asset allocation, diversification, and rebalancing. Lifecycle funds also are known as target date funds.

Question 6

Mutual Fund

Answer 6

The common name for an open-end investment company. Like other types of investment companies, mutual funds pool money from many investors and invest the money in stocks, bonds, short-term money-market instruments, or other securities. Mutual funds issue redeemable shares that investors buy directly from the fund or through a broker for the fund instead of from other investors.

Question 7

Portfolio

Answer 7

The combined holdings of stock, bond, commodity, real estate and other investments by an individual or institutional investor.

Question 8

Real Estate Investment Trust (REIT)

Answer 8

A company that owns and typically operates income producing real estate or real estate-related assets, such as office buildings, shopping malls, apartments, hotels, resorts, self-storage facilities, warehouses, and mortgages or loans.

Question 9

Rebalancing

Answer 9

Rebalancing brings a portfolio back to its original asset allocation mix. This is necessary because over time, some investments will grow faster than others, and holdings may become out of alignment with investment goals.

Question 10

Risk Tolerance

Answer 10

An investor’s ability and willingness to lose some or all of an investment in exchange for greater potential returns.

Question 11

Stock

Answer 11

An instrument that signifies an ownership position (called equity) in a corporation, and a claim on its proportional share in the corporation’s assets and profits. Most stocks also provide voting rights, which give shareholders a proportional vote in certain corporate decisions, such as the election of corporate directors.

Question 12

Target Date Fund

Answer 12

A diversified mutual fund that automatically shifts towards a more conservative mix of investments as it approaches a particular year in the future, known as its “target date.” A target date fund investor picks a fund with the right target date based on his or her particular investment goal. The managers of the fund then make all decisions about asset allocation, diversification, and rebalancing. Target date funds also are known as lifecycle funds.

Question 13

Time Horizon

Answer 13

Your time horizon is the number of months, years, or decades you need to invest to achieve your financial goal.