Straight Talk on Three Investing Myths

Ah, the siren’s call of an urban myth.

When it seems like everyone you know has heard the same story, it’s easy to convince yourself it is true. But when it comes to investing, listening to a myth can lead you to invest in a way that doesn’t suit your individual needs, or even to avoid investing altogether. Start 2016 off right by getting the facts on three common myths about investing.

Myth: Stocks are too risky.

Reality: One of the best ways to give your money a chance to grow over the long term is by investing in stock funds.

U.S. stocks have consistently earned more than bonds over the long term. Take a look at our illustration: Stocks have returned an average of almost 10% each year for the last 50 years, while bonds returned 7% and short‐term investments returned 5%. What this shows is that stocks typically offer more potential for growth over the long term, despite regular market ups and downs. That's why investing in stock funds is so important when saving for a long-term goal like retirement.

And while market downturns can be scary, you can take the edge off your fears by remembering that the market is cyclical. It has highs and lows. Unless you’re expecting to retire in the next five years or so, your savings in the UC 403(b), 457(b), and DC Plan is there for the long haul. The key is to wait through the fluctuations, trust your strategy, and stay the course.

For example, consider three very poor market scenarios: the Great Depression, the early 1970s, and the recent 2008 Great Recession. Say you had an aggressive portfolio of 85% stock funds and 15% bond funds in your 403(b) Plan account during the Great Recession of 2008. You would have lost around 44% from October of 2007 to February of 2009. But, if you held on to those stock funds, by April of 2011—less than four years later—the portfolio was back to its 2007 high. While this may seem like a long time, it is a small part of a 30‐year investment horizon. Of course, there is no way to predict how long it will take for the market to recover. It took almost 14 years during the Great Depression and a little more than three years during the 1973 recession. But in both cases, the market did recover and those who kept investing were rewarded.*

As a general rule, the longer you have to invest your money, the more you may want to invest in stock funds, because time can help smooth out short-term ups and downs. Of course, the mix of stocks, bonds, and short-term investments that’s appropriate for you should be based on your tolerance for risk, your financial situation, and when you expect to start withdrawing money from your account.

Myth: Investing is hard.

Reality: UC Pathway Funds make it easy.

Investing for retirement may seem overwhelming, but it doesn’t have to be. The UC Pathway Funds make investing simpler by providing a professionally managed mix of stock funds, bond funds, and short-term investments, all in one fund. These funds are designed for investors who want to simplify allocation decisions by using a professionally managed, pre-defined asset mix. Here’s how they work:

  • Each UC Pathway Fund has a year in its name—its “target date.” You choose one fund based on the year closest to the date you expect to retire—or when you will start withdrawing money from your 403(b), 457(b), and/or DC Plan account.
  • Over time, each fund is regularly rebalanced to grow more conservative as it reaches its target date. For example, if you’re thinking about retiring at age 65 in 2044, you might consider the UC Pathway 2045 Fund. As 2045 gets closer, the fund becomes more conservative—generally investing less in stocks, and more in bonds and short-term investments.
  • The result: You get an investment mix that’s appropriate for someone your age—today and when you’re about to retire. Note that there is also a target date fund option for participants already in retirement—the UC Pathway Income Fund.

Myth: If a little is good, a lot must be better.

Reality: It is possible to be over-diversified.

We’ve all heard the saying “Don’t put all your eggs in one basket.” It’s generally sound advice for investors. After all, holding investments that respond differently to market changes can serve as a sort of shock absorber. When one investment is down, another may be up. But it is possible to be over-diversified. Here are two traps to avoid:

  • Investing in multiple funds in the same investment category. Generally speaking, funds that invest in the same way are affected by the same kinds of market events. For example, if you hold three large cap stock funds, those funds will generally move in the same way at the same time. The performance of each fund may vary a little from the others, but practically speaking, an event that affects one large company will affect others as well. Different-sized companies tend to lead the market at different times, so a healthy strategy considers stock funds with small, medium, and large market capitalizations. Like bond funds? Consider both government and corporate bond funds with different yields, maturities, and credit quality. Finally, because financial markets around the world respond differently to regional and global events, consider whether international investments make sense for you.
  • Investing in multiple UC Pathway Funds. Each UC Pathway Fund is a target date fund designed to give you an all-in-one investment mix that grows more conservative over time. That means you only need to hold one UC Pathway fund to be invested in an age-appropriate mix of stock funds, bond funds, and short-term investments. Generally speaking, when you hold more than one UC Pathway Fund—or hold a UC Pathway Fund plus other funds in the UC RSP fund menu—you may be duplicating exposures and not taking full advantages of the UC Pathway Funds.

The Bottom Line

A blended approach that includes different types of investments—stock funds, bond funds, and short-term investments—can help you meet your unique objectives. Just make sure that your mix reflects your own financial situation, your tolerance for risk, and the amount of time you have until you start withdrawing money from your accounts. In general, it’s easier to understand how your investment mix is doing if you keep it to a manageable number of holdings. If you like the idea of a professionally managed, all-in-one investment mix based on a target date, a UC Pathway Fund could be just right for you.

The investment risks of each target date Pathway Fund change over time as each fund's asset allocation changes. Assets held in the Pathway Funds are subject to the volatility of the financial markets, including equity and fixed income investments in the U.S. and abroad, and may be subject to risks associated with investing in high yield, small cap, and foreign securities. Principal invested is not guaranteed at any time, including at or after their target dates.

*Data Source: Ibbotson Associates. Stock markets are volatile and can fluctuate significantly in response to company, industry, political, regulatory, market, or economic developments. Investing in stock involves risks, including the loss of principal (the amount you invest).

Before investing in any investment option, please carefully consider the investment objectives, risks, charges, and expenses. This and other information on the UC Retirement Savings Program Fund Menu is available, free of charge, online at www.myUCretirement.com or by calling Fidelity Retirement Services at 1-866-6UC-RSVP (1-866-682-7787). This and other information on mutual fund options that are part of the UC Retirement Savings Program Fund Menu and other mutual funds outside the UC Retirement Savings Program Fund Menu can be found in each mutual fund’s prospectus, or, if available, a summary prospectus, which can be obtained, free of charge, at the same Web site and toll-free phone number. Read the information carefully before you invest.

Keep in mind that investing involves risk. The value of your investment will fluctuate over time, and you may gain or lose money.

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