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Understanding Basic Investment Categories

Mutual funds are investments that pool together money from a large group of investors. The fund is managed by a professional fund manager(s) who determines the fund's mix of stocks, bonds, cash alternatives, and other securities. The fund manager is responsible for selecting and diversifying the fund’s investments to meet the fund’s investment objective while managing risk. Mutual funds are typically common investment options for retirement plans. When planning an investment strategy, it's important for investors to consider the three basic asset categories (also referred to as asset classes) of funds: stocks, bonds, and cash alternatives. Before investing in any mutual fund, you should read about their potential risks, which are explained in detail in each mutual fund’s prospectus.

Stock funds

Stock funds are made up of stocks from different companies. The value of stocks may go up and down, but based on historic returns, stocks have offered a better opportunity for long-term growth, compared to bonds and cash alternatives. However while stocks offer long-term growth potential, they may fluctuate more and provide less current income than other investments.  (See the Introduction to Market Capitalization, International Investing, and Comparing Growth vs Value articles to learn more.)

Bond funds

Unlike a stock, which represents ownership in a company, a bond is similar to a loan or an IOU. With a bond, money is loaned to a company or government entity in exchange for regular interest payments, plus a commitment for the return of the full loan amount, or face value, when the loan matures.

The value of bonds typically does not fluctuate as much as stocks, although historically bonds have provided less long-term growth potential. Bond prices fluctuate inversely to changes in interest rates. A general rise in interest rates can result in the decline in the bond’s price. Therefore, they have moderate risk and return potential. (See the Taking a Closer Look at Bonds article to learn more.)

Cash alternatives

Cash alternatives are low-risk, short-term securities. An investment in a cash alternative fund has historically offered limited potential for gains, especially for investors with longer time horizons, due to inflation.

Asset allocation funds and model portfolios

Other investment options that may be offered in a retirement plan are asset allocation funds or model portfolios. Allocation funds are designed to provide a diversified investment mix with the fund options in your retirement plan. The portfolios are designed to correspond to different investor types (e.g. conservative, moderate, growth, aggressive). Because investments grow at different rates, the portfolios are automatically rebalanced on a regular basis so the portfolios maintain the target investment mix.

If you want to invest in these portfolios, you may find it helpful to identify what type of investor you are (e.g. conservative, moderate, growth, aggressive). To help you determine your risk tolerance level and investment style, an assessment is available at wellsfargo.com/risk quiz.

In making your selection, you may also want to consider your time horizon to retirement. The portfolio you choose today may not be appropriate for you in the future. As you approach retirement, or your investor type changes, you may want to invest in a different portfolio or make selections from the other investments available in your plan.

Target date funds

Target date funds are mutual funds designed to provide a diversified mix of investments that automatically rebalance to become more conservative as an individual gets closer to retirement. Each target date fund is diversified across a range of stocks, bonds, and cash alternatives, allocated according to the fund's target date. The target date, which is typically included in the name of the fund, represents the year the individual may be considering retirement or beginning to withdraw his or her money.

As the target date approaches, the fund gradually becomes more conservative, with less invested in stocks and more in bonds, and cash alternatives. With a target date fund, the shift from growth-oriented funds to conservative funds over time occurs automatically. The principal value of the fund is not guaranteed at any time, including at the target date. You should select the target date fund offered by your plan that best meets your needs, based on your individual circumstances and goals.