Risks & Returns

What Kind of Investor Are You?

Your investment strategy needs to take into account your comfort with risk. Put another way, with which risk are you less comfortable—potentially losing a noticeable portion of your retirement savings in a fairly short time period or potentially winding up with a smaller account value at retirement? If you can answer that question you’ll be well on the road to selecting the right investment options for yourself.

How comfortable are you with risk? There are lots of simple surveys you can take to help you answer that question. MMBB believes that one of the best is available through Rutgers University. We think you’ll find it fun, thought provoking and insightful.

Risk

First, let’s take a look at the risks you may face as an investor. To see how these risks apply to the nine MMBB investment options, select the risk tab of each investment option. In addition, below we discuss a few of the usual risks all investors face. This is not a comprehensive list; it is only intended to give you an appreciation of some of the major factors that can influence the outcome of your investment decisions.

Business Risk

Companies may run into financial difficulties and not be able to meet their business objectives. Their business may get so bad that the company goes into bankruptcy. When this happens, stock prices go down. Even companies that are doing well may see their stock prices decline when the overall economy declines.

Credit Risk

While business risk may be more of a factor for those investing in stocks, credit risk may be a bigger risk to those investing in bonds. If a corporation or government entity that issues bonds defaults on the interest payments and/or the repayment of principal, the value of the bond declines and the value of the investment declines.

Credit rating agencies, such as Moody’s and Standard and Poor’s, assess the quality of bonds. The credit rating agencies analyze the issuer’s financial condition, management, debt characteristics and revenue sources securing the bond. Credit rating agencies can make mistakes. Remember that all of the credit rating agencies gave the banks very high ratings just before the financial system collapsed in 2008.

Market Risk

Your investment will fluctuate as a result of market conditions. We invest with the expectation that over time each of MMBB’s investment funds will increase in value. Bear in mind, however, that if you select, for example, a fund that has all or part of its investments in the stock market(s), and those markets decline, then the market value of your investment can also fall.The same goes for the fixed income, or bond market, investments. Despite the reference to “fixed income,” bond market investments are not fixed in a positive direction; bonds can rise and fall in value, often in direct opposition to the rise and fall of interest rates.

Interest Rate Risk

Interest rate risk is most apparent in the bond markets. Bonds are issued at specific interest rates. Generally, a rise in market interest rates tends to cause a decline in market prices for existing bonds, while a decline in interest rates tends to cause a rise in bond prices.

Purchasing Power Risk

Inflation is a fact of life. If the rate of inflation is 5%, your investments need to grow by 5% simply to maintain the same buying power. An investor may think a traditional bank savings account is relatively risk-free, but, unless the interest rate on the account exceeds the current rate of inflation, the investor is losing purchasing power.

Return

You invest in order to earn a return on your investment. Return can take a variety of forms, including interest, dividends and capital appreciation (increase in value). Return is usually expressed as a percentage, whether as a rate of interest or a percentage increase in value.

Keep in mind that two factors can have a significant impact on actual return. One is income taxes. A taxable investment earning an 8% annual rate of return is earning the equivalent of 5.76% after taxes for the taxpayer in a 28% tax bracket. This is why tax deferral — a characteristic that is found in all of MMBB’s retirement plans — is such an important advantage.

The other important factor is inflation. Inflation reduces the purchasing power of your return. An investment earning an 8% annual rate of return during a period when inflation is running 3% has a 5% real rate of return.

The Risk/Return Tradeoff

All investments carry some degree of risk, including loss of capital (value) and loss of purchasing power. Typically, though, the return on your investments will compensate you, over time, for the risk. Risk is often expressed in the marketplace as volatility (the magnitude and speed with which an investment may rise and fall). Historically, higher returning investments have often been associated with higher volatility; conversely, safer, low-risk investments, have usually produced returns that are be correspondingly low over long periods of time.

Compare the risk-return relationship of MMBB’s investment options.