As you divide asset classes further, the process of refining becomes more complex. For example, do you include both a money market fund and a short-term bond fund? Defining and refining asset classes takes time and forces the decision-maker to consider for whom the investments are intended and how they will be used but in the end, the refinement process should lead to choices that are appropriate for your group. Also, the need to create meaningful distinctions among asset classes must be weighed against the increased difficulty in communicating investment choices to employees. It is well documented that too many choices leads to participant overload and confusion. Keeping in mind the broad categories below should help you create a portfolio right for your participants.
- Value & Growth — Value and Growth styles are the yin and yang of investing. Value investors search out underperforming and out-of-favor companies whose core business still remains operationally sound. Growth investors, on the other hand, seek companies whose earnings, sales, margins and stock price are growing rapidly.
- Market Capitalization — Companies of different sizes exhibit different patterns of growth. General economic conditions affect all companies but the stock prices of large, medium, and small companies do not move in tandem, and in fact move counter-cyclically. When one group goes up, another one may go down and vice versa.
- International and Domestic — Although the US is the world's largest economy, there are many excellent companies outside of the U.S. Investing outside the U.S. allows investors to further diversify their portfolio.
- Active vs. Passive (Index) — A passively managed portfolio seeks to replicate an index like the S&P 500, Russell 2000, or Wilshire 5000. Because indexed portfolios do not have to support the research infrastructure of an actively managed portfolio, their cost is significantly lower. Index funds also have lower turnover ratios and as a result have lower overall transaction costs making them an excellent option for qualified plans.
Please note that neither Blue Prairie Group nor ADP can provide you with legal advice regarding your fiduciary duties under ERISA. This article and those following are not intended to constitute or be relied on as legal advice, but a description of applicable principles. Please consult with your attorney for legal advice on matters contained in these articles.
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