For creating a sound investment strategy.

Five Rules For creating a sound investment strategy. 5 Part one of the two-part guide series Saving Smart for Retirement. The most important decision you will probably ever make concerns the balancing of asset categories (stocks, bonds, real estate, money market securities, etc.) at different stages of your life. Professor Burton Malkiel of Princeton University, author of A Random Walk Down Wall Street, and former member of the Council of Economic Advisors 2016 Capital One. Capital One and ShareBuilder 401k are federally registered service marks. All rights reserved. Advisory services are provided by Capital One Advisors, LLC, an SEC registered investment advisor and a subsidiary of Capital One Financial Corporation. ShareBuilder 401k and Spark 401k are the marketing names for Capital One Advisors, LLC. Securities and services are: Not FDIC insured Not bank guaranteed May lose value Not a deposit Not Insured by any Federal Government Agency

Saving is about much more than money. It s about peace of mind. The kind that comes from knowing that you ll be able to retire in comfort. And have the resources you need to weather life s storms, provide for your family, and turn your dreams into reality. What s the best way to go about saving for today and tomorrow? You ll find specific answers in this easyto-read guide from ShareBuilder 401k. We hope you enjoy it and that you find it of real value. We also invite you to read our companion guide titled Six Rules for Making Smart Investment Choices. It was designed to help you make appropriate investment selections. An important word about risk: It s important to remember that investing in stocks involves risk. Markets are unpredictable and may or may not act in the future the way they have in the past. However, we believe that by following sound principles and applying them consistently over time, you can get on track to meet your goals and achieve financial peace of mind.

Reaching your financial goals may be easier than you think. This guide was designed to provide you with a simple, practical, common-sense investment strategy. In it, we explain: Why it s so important to start saving early Why diversified, low-expense investment options can better help you build a comfortable nest egg Why asset allocation decisions are crucial (asset allocation simply refers to how you divide your money among investment types) How investing on autopilot can help you reach your investment goals

Planning for retirement: how much will you need to save? Decisions about how much to save depend on your retirement goals. You may want to retain your current standard of living through your retirement years. Or perhaps you hope to travel, or leave something to your children or grandchildren. Many financial experts believe that you will need 75% of your current annual income for every year of retirement, or a total of eight to ten times your current annual income (for those in established careers). An easy way to make a quick estimate of the total amount you ll need in retirement is to multiply your current salary by 9. These calculations, of course, are simply starting points. Every person s situation and goals are different. Because health care costs are rising, Americans are living longer, and the future of Social Security is in question, you may need more than 75% of your current income each year after you retire. This means you should set a target of at least 75% and then make adjustments based on your personal goals. To help get you on your way to achieving your savings goals, let s take a closer look at the market.

An important fact: the U.S. stock market has outperformed other investment types over time. That s right. Since 1926, U.S. stocks have delivered 9.9% returns, bonds 5.4%, and cash 3.6%. 1 This is why, depending on how long you have until retirement, you may want to invest a majority of your savings in stocks. The reason stocks typically wouldn t make up 100% of your portfolio is that they are more volatile, and there is no guarantee that they will continue to outperform other investment types in the future. Another related point: You may hear from a friend, or in the media, that a certain stock or mutual fund is outperforming the market. So you decide to chase good results and make an investment in that stock or fund. But after making the investment you find that its value starts to decrease. This happens quite often to investors who try to jump on the bandwagon. That s because by the time the secret is out and everyone knows the positive information, it s too late to make a profit. Or perhaps you ve heard about an equally powerful force called the reversion to the mean. This statistical rule says that a fund or asset class that outperforms the market for a period of time will underperform for another period of time. In other words, over the long run, the market will gravitate back towards its average (mean) results. To put it simply, today s media darlings are often tomorrow s fallen angels. 1 Source: Ibbotson Associates, a subsidiary of Morningstar Inc. The numbers referenced reflect returns for the S&P 500, U.S. government bonds, and cash from 1926 through 2010. It s important to remember that investing in stocks, bonds, and even money market instruments involves risk. Markets are unpredictable and may or may not act in the future the way they have in the past. Investing over time does not assure a profit or guarantee against a loss.

To build wealth, start now and save for the long run. 1RULE Starting young is the key to wealth accumulation and the smart way to grow your investments over time. Why is this true? Because time can have a surprisingly powerful effect on the size of your nest egg. To understand how invested savings can grow over time, let s take a look at Mary and Bill s retirement plans. Mary and Bill earn the exact same salary and share identical investment goals. Their investment returns are 8% per year every year after expenses. The only difference is one starts investing earlier than the other! Mary begins setting aside $3,000 a year in her company 401(k) at age 27. She contributes for 10 years and then stops saving completely. Bill waits until the age of 37 to start investing $3,000 a year in his 401(k), but he continues to invest for 30 consecutive years. Mary Bill $600,000 $500,000 $400,000 $300,000 $200,000 $100,000 $0 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59 61 63 65 67 This example compares how savings and returns placed in the same investment with different time horizons can grow over time and will differ over time. It assumes an 8.0% fixed annual rate of return. Your account may earn more or less. This is a hypothetical example only, and not a guarantee of future returns. Actual experience will vary with portfolio selections and changing market conditions. The total account balance does not take into account federal and state income taxes, which will be due upon withdrawal. Assets withdrawn before 59½ may incur a 10% tax penalty. Mary contributed $30K in total to her retirement plan, and has $510,089 at age 67. Starting ten years later, Bill contributed $90K three times as much! yet by age 67 has only saved $399,640.

Take advantage of the power of compounding. 2RULE The example in Rule #1 begins to illustrate the awesome power of compounding. Perhaps an easier way to see how savings grow over time is to look at a one-time investment of $1,000. In the chart below, you can see how just $1,000 compounds and shoots up the chart at the 10-, 20-, 30-, and 40-year marks: Getting a late start? You re in luck, there is help! 401(k)s allow people who are 50 or over to contribute more than those who are younger. In 2016, a person age 50 or over can contribute $18,000 annually plus an additional catch-up contribution of $6,000. $1,000 invested with 8% annual return 1 $25,000 $20,000 $15,000 $10,000 $5,000 $0 Year 10 Year 20 Year 30 Year 40 1 This example compares how a one-time investment of $1,000 can grow over time assuming an 8.0% fixed annual rate of return. Your account may earn more or less. This is a hypothetical example only, and not a guarantee of future returns. Actual experience will vary with portfolio selections and changing market conditions. The total account balance does not take into account federal and state income taxes, which will be due upon withdrawal. Assets withdrawn before 59½ may incur a 10% tax penalty.

3RULE Don t let fund expenses drag you down. The expenses your fund charges can be the biggest drag on your ability to grow your nest egg. Consider this fact: The average active U.S. mutual stock fund has an expense ratio of 1.52% 1. Let s assume that this year the stock market delivers its historical average of 10.4%. For your fund to meet the market average, your fund will need to return 11.92%. While some may brag that their funds beat the market this year, if you deduct fund costs, this may not be true at all. This is why it s so important to be aware of your fund s expenses and look at the prospectus. We offer index funds because they typically have low expense ratios. That s why we believe strongly in index-based investments called Exchange Traded Funds (ETFs). And for most 401(k)s, transaction fees don t apply. This helps to make ETFs very efficient investments. To give you an idea of how low expense ratios are for index-based investments, an ETF fund (such as SPDR, series 1) tracking the S&P 500 tends to carry an expense ratio of around 0.1%. We call that a market-efficient fund! 1 Source: Morningstar Inc., an investment research firm.

Use diversification* to balance risk and return. 4RULE The concept of diversification is both easy to understand and extremely important. There are three main asset classes: stocks, bonds, and cash. Owning any single stock or bond is more risky than owning many stocks or bonds. To diversify within an asset class, simply own many securities not just a few. Then consider the different asset classes you can choose from. Stocks, as an asset class, are the most volatile but have had the greatest returns over time. Bonds and cash follow. Because financial markets prosper or struggle, depending on economic circumstances, there is no guarantee of high future returns. Even wide diversification can t fully protect you against a declining market. But there s good news. Stocks and bonds do not always move together in lockstep and their volatility often differs. Therefore, holding a broad-based portfolio of different asset classes gives you wide diversification that can help to limit your risk. Thus, there are two key rules to follow: 1. Diversify within each asset class. Don t hold just one or two stocks. The risk is high that you will lose money versus a small chance that you will outperform the markets. Instead, choose an index fund or broad-based fund that covers a large swath of the market. Example: A diversified stock portfolio might include a 80% investment in a total U.S. market index fund and a 20% investment in a total international stock market fund. 2. Diversify across asset classes. This means you should choose to invest a percentage of your savings in each of the asset classes stock, bonds, and cash based on your personal comfort level. Example: A person who s 40, with a moderate tolerance for risk, might allocate 70% to stocks and 30% to bonds in their 401(k), and manage cash reserves in their personal money market account. *Diversification does not guarantee a profit or protect against market losses.

Make sure your assets are allocated correctly. 5RULE Asset allocation is technically just part of the diversification strategy discussed above. The important thing to know is that since the first asset allocation study was conducted in 1986, industry research and financial theory have continued to demonstrate that asset allocation has a greater influence on your portfolio s performance than the specific funds you select. 1 The important point is that you should really consider a percent to invest in each asset class (e.g. 60% stocks, 40% bonds). Your asset allocation needs to fit your goals, your comfort with market swings, and the time until you will use those funds. bonds The younger you are, the more time you have to travel through the market s ups and downs. A younger person should consider investing more in stocks upwards of 90% if she is in her mid-twenties with only 10% in bonds. stocks Conversely, a person who is 62 and plans on retiring in three years may be better served by a portfolio comprised of 60% in stocks and 40% in bonds. In general, most people want to keep more of their investments in stocks, given the asset class s long-term history of superior performance. Even at age 65 you may not have to access your stock funds for ten or twenty years or more, which means you may have a good chance of riding out storms in the market. With a good asset allocation plan, you can invest with confidence. Some providers offer tools like auto-rebalancing at no additional charge. They will automatically maintain the percent allocation you designate, making it easy to manage your plan. 1 Determinants of Portfolio Performance, by Gary Brinson, Randolph Hood, and Gilbert Beebower. Financial Analyst Journal. July/August 1986.

Let s summarize the keys to creating a sound investment strategy: 1. Start investing now 2. Time is your friend compounding can be huge 3. High costs are a drag on profits avoid them 4. Diversify, diversify, diversify 5. Manage asset allocation carefully By following these rules you can feel confident that you re building a solid investment plan for the long term. Stick with your strategy, avoid the herd s performance-chasing mentality, and you stand a great chance of weathering the inevitable storms. Read our companion guide: Six Rules for Making Smart Investment Choices It s loaded with practical, valuable information you can put to work immediately. If you haven t read it yet, you can download it now. Also you may want to check out our Savings Calculator. Want to learn even more? Then try these books: Bill Bernstein, The Four Pillars of Investing Burton Malkiel, A Random Walk Down Wall Street Larry Swedroe, The Only Guide to a Winning Investment Strategy You ll Ever Need