Basics of Investing

Investing is different for everyone. Whether you’re buying and selling hundreds of shares of stock each day, or simply stashing $25 a month in your savings account, you are investing in a way that is right for you. And whether you are a new investor or a seasoned veteran, it is important to learn and frequently review some basics of investing.

Why People Invest

Essentially, people invest with the intention of creating greater wealth. Retirement, college tuition, and new home purchases are common investment goals. You can never be too young — or too old — to invest. While investing early in life is ideal, you shouldn’t worry if you haven’t done so and you are approaching retirement age. Check out Retirement Planning to learn more about your options to make up for lost time. Investing can be fun, and with so many investment choices available, there is sure to be an investment and a plan for you.

Professional Help

Managing your investments on your own can be overwhelming. Contribution limits, tax laws, market trends — do you really have the time and energy to stay on top of the game? If not, you should consider paying a visit to a financial professional.

Financial professionals have invaluable knowledge and can help point you in the right direction. They can help you create an investment plan that will assist you in the pursuit of your monetary goals. If you don't feel comfortable managing your money, or simply prefer to take a passive role in the investment process, financial professionals are glad to help, and they have the knowledge and ability to manage your assets for you.

Types of Investments

There are many different types of investments. The most widely known types of investments include stocks, bonds, and annuities. A share of stock represents ownership in a corporation. Shares of stock are available in various forms. Common stock shares enable an investor to vote on important matters such as the board of directors. However, common stock holders are last in line for dividend distribution and payment if a company goes bankrupt and is liquidated. Preferred stock holders own stock shares that pay a fixed dividend, and give their holder a claim to earnings and assets that take precedence over the claims of common stockholders.

When an investor purchases a bond, the bond represents a loan the investor makes to the entity he or she purchased it from — usually a corporation or government entity. The buyer is repaid the principal amount and interest at intervals over a specified amount of time. The time at which the debt must be repaid is referred to as the bond's maturity. Unlike stockholders, bondholders are not entitled to any corporate ownership privileges.

Annuities are contracts you can purchase from insurance companies that guarantee future, regular payments to the contract holder, typically at retirement. The amount of the payment depends on whether you've purchased a fixed or variable annuity. With a fixed annuity, the interest rate is set, as is the amount of the payments that are received. The rate of return and amount of payments on variable annuities depend on the performance of the underlying investments, or subaccounts. Click here to learn more about annuities.

Distributions are subject to ordinary income tax and if taken prior to age 59½, may be subject to a federal income tax penalty.

Guarantees are based on the claims-paying ability of the issuing company.

Fixed and variable annuities are long term insurance products that are designed for retirement purposes. Variable annuities contain underlying investment portfolios that are subject to market fluctuation, investment risk, and possible loss of principal. Due to fluctuating market conditions, at the time of distribution, your annuity value may be more or less than the total of all premiums. Variable annuities costs usually include a modality and expense risk fee, administrative charge, annual contract fee, and sub-account charge.

Risk and Reward

In the investing world, financial reward is often accompanied by a degree of risk. Logically, an investor who is prepared to take on greater investment risk expects a greater return, whereas an investor who chooses not to take on as much risk should reasonably expect a slower rate of growth in turn for reduced risk. Risk tolerance is different for every investor, and is determined by many factors. The relationship between risk and reward cannot be overlooked when making investment decisions, but it shouldn't be a paralyzing factor that prevents you from investing. There are many strategies, including diversification and asset allocation, which can help you effectively manage the risk in pursuit of a financial reward.

Investing in a savings account or money market account, for example, is a very low-risk investment that will likely result in rather modest returns. While returns may be modest, the level of risk is very low as your money is drawing interest and not invested in individual securities.

Investing in small-cap stocks, on the other hand, is an example of a high risk, high reward investment. The potential is there for bullish gains, but on the other side of the coin, the same risk is there for potential losses, as your money is invested in a specific company whose stock price can always fluctuate.

Risks of a portfolio may be greater due to the smaller size of the companies in which it invests. The small company stocks tend to be more volatile and less liquid than general equity markets.

Identifying Your Personal Investment Strategy

Before sending a check or even filling out an application to open an investment account, you should establish an investment strategy. This involves laying out your goals and creating an investment plan that will enable you to achieve these goals. There are several factors to take into account when developing your strategy, including your age, the amount of time you have to invest, and the amount of risk you are able to assume. A financial professional can help you sort through these issues.

Common Mistakes

While establishing an investment plan and strategy can help you determine your goals and assist in investment selection, there are many mistakes investors can make that can potentially hurt your portfolio and hinder growth. Some of these mistakes are detailed below.

• Not Investing at All. Even if you’ve only got a spare $50, you should invest it if you can. Studies have shown that money sitting in a savings or checking account, earning a minimal interest rate, cannot keep up with inflation and taxation over time. So take advantage of the opportunity to invest when it presents itself.

• Waiting Too Long to Invest. Procrastinators beware: the earlier you start saving, the better off you will be down the road.

• Ignoring Free Money. Some company sponsored retirement plans, including 401(K) and 403(b)(7) plans, offer the equivalent of free money by matching the contributions you personally put into a qualified retirement plan. Savvy investors are wise to take advantage of these types of plans, for both the additional contributions and the tax benefits associated with qualified plans.

• Being Too Daring. If an investment opportunity looks too good to be true, it probably is. Be prudent, carefully researching any speculative investments before entering into something you might regret later. Remember, it's better to be safe than sorry when it comes to your hard-earned money.

• Being Too Cautious. Although you should show caution when investing, there may be a point where caution turns into paranoia. The happy medium between being too daring and too cautious is where you should aim to be. A 25-year-old who invests only in a money market account is probably being too cautious, for example.

• Spending the paycheck on Lotto tickets. Lottery Tickets Are NOT Investments. Picking up a lottery ticket when the jackpot is at a few million can be fun. But it's unwise to drop a few hundred bucks on quick picks, resting your desire for financial security on the hope that your numbers are going to come in. That's money better invested for your future.

• Trading Like It's Going Out of Style. Adjusting your portfolio to maintain balance or to accommodate your changing needs is understandable. But when you begin moving into and out of investments on a monthly, weekly, or daily basis, you're setting yourself up for disappointment. Over time, fees will chip away at your investments. In addition, since no one can predict the rise or fall of the market, frequent trading may ultimately cause you to miss out on unexpected gains, or be hit especially hard by steep losses. Consider this: "During the 15 years from 1982 to 1997 mutual funds average approximately 15% in annual returns. However, the average mutual fund investor averaged only 10%. Why? Because instead of developing an astute long-term investing program and staying with it, investors jumped around from one fund to another." (Source: Charles Ellis, Winning the Loser's Game, McGraw-Hill, 1998.)

Dollar Cost Averaging

Whether you work 80 hours a week on Wall Street or you consider your investment knowledge to be rather limited, you probably understand the stock market will inevitably go up and down. What you don’t know, regardless of your investment savvy, is when. Chasing the stock market up and down is not considered smart investing and can lead to unanticipated losses.

Dollar cost averaging, a method by which you invest a specified amount of money at specific intervals, can help hedge against short-term market fluctuations This strategy allows you to buy more units when the price is down, and fewer units when the price is up, potentially lowering the average cost of the security. This takes the guesswork out of when to buy the security and eliminates the urge to time the market’s ups and downs.

There are many ways you can implement this strategy, but one of the easiest is through an Automatic Investment Plan (AIP). Once set up, your AIP automatically transfers money out of your bank account (savings, checking, or money market) to your account in the amount and on the date you specify. Regardless of the fixed amount you invest — be it modest amounts or large amounts — dollar cost averaging offers the same potential benefits.

Although DCA does not assure a profit or protect against a loss in declining markets, it does allow you to take advantage of market fluctuations. Investors should consider their ability to continue regular investments through periods of low price levels when deciding whether to participate in an AIP.

Timing the market, buying only when you anticipate the price to be at a low point, is a risky strategy. The discipline that dollar cost averaging brings can result in a lower average cost per share over the long term, and helps you protect your investments from price fluctuations. Dollar-cost averaging takes the guesswork out of investing and helps spread risk as well as potentially reduce the average price paid for your investment.

While Dollar Cost Averaging is often used with the intent of achieving potentially higher returns based on stock market performance, there is no guarantee that Dollar Cost Averaging will result in higher policy values or prevent potential losses in a declining market. This strategy requires the ability to continue making transfers over periods of high and low price levels. Amounts allocated to the subaccounts of the separate account are subject to market conditions and are subject to investment risk including loss of principal. If a fixed rate is paid, it is paid on a declining balance.

Diversification

Diversification is an important component of risk management. When assets are concentrated in only a few securities, you assume greater risk, because if one performs poorly it will hurt your entire portfolio to a larger degree. Diversification distributes your money among a variety of investments, helping to reduce risk and prevent extreme loss by offsetting losses from some securities against potential gains from others. This can ultimately provide greater stability in your personal portfolio.

Variable annuity subaccounts typically hold securities from hundreds of varying issuers. By doing so, these investments attempt to deflect risk resulting from the fluctuations of individual securities, accounting for the fact that investments shift in value at different rates and at different times. The diversification made available through variable annuities is generally considered one of their most attractive features.

Variable annuities are subject to investment risk, including possible loss of principal. Due to fluctuating market conditions, at the time of distribution, your annuity value may be more or less than the total of all premium payments.

It would be much more difficult for a single investor to attain such a high level of diversification, considering the expense and time involved in purchasing individual securities on their own. In addition, it can be very time consuming and confusing to maintain a balanced portfolio of stocks and bonds without professional guidance. Variable annuities help solve this problem by offering both diversification and active money management by professionals.

Please read the prospectus carefully before you invest.

Asset Allocation

Asset allocation is one of the most effective ways to diversify a portfolio.

When the stock market was hitting new highs in the 1990s, many investors thought it was a smart move to put all their eggs in the equity basket. But market volatility over the past three to four years has reminded investors about an effective risk management tool — asset allocation.

Help your portfolio make the grade

By allocating assets among different investments, such as stocks, bonds, and money markets, you may help to reduce the level of risk in your portfolio. Different asset classes such as growth and value stocks, or large-, mid-, or small-cap, can chart divergent courses as they move in and out of favor with investors. For example, from 1994 through 1999, large-cap stocks outperformed long-term government bonds.* However, the tables turned in 2000 and 2001, when stocks underperformed bonds.* Diversifying your portfolio among different asset classes may help to even out investment returns over time. Strong performance in one sector during a particular period can offset poor performance in another.

Investors who chase the latest hot asset class may be moving into an area just when it's about to cool down. Conversely, they may be moving out of an underperforming sector just when it's heating up. Using asset allocation helps to take the emotion out of investing.

An investment in the money market subaccount is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the money market subaccount seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in this subaccount.

Personalized percentages

How much you decide to allocate to each asset class will be determined by various factors, such as your goals, risk tolerance, and investment time horizon. An aggressive investor with a high tolerance for risk and a long investment timeframe may elect to include a greater percentage of stock portfolios and a lower percentage of bond and money market subaccounts in his or her portfolio. A conservative investor may prefer a higher percentage of bond and money market portfolios and a smaller percentage of stock portfolios.

Talk to your financial professional about establishing an asset allocation program that's suitable for your situation and needs. As your goals and circumstances change, be sure to consult your financial professional about rebalancing your portfolio accordingly.

Note: Stocks are more volatile than other securities. U.S. Government Bonds are guaranteed as to the timely payment of principal and interest and pay a fixed rate of interest. Past performance is not indicative of future results.