Asset Allocation
Dividing your investments among different asset classes in order to maximize returns over specific time horizons and to reduce the impact on your portfolio of poor performance by any one security or type of asset. Because different types of assets, such as stocks and bonds, experience different cycles of ups and downs, a portfolio that contains a mix of asset classes may provide more consistent returns.

Asset Classes
Stocks, bonds, and money market instruments are the basic types of investments. Mutual funds are broadly grouped as stock funds, bond funds, and money market funds.

Bonds and Bond Funds
Loans to a company or government entity. The issuer pays the bondholder a fixed rate of interest on the loan, and repays the initial investment at the bond’s specified maturity date. Maturities may be long-term, intermediate-term, or short-term; generally, the longer the term, the higher the risk and rate of interest paid to the bondholder. Similarly, issuers of bonds that have lower credit ratings may offer higher rates of interest to bondholders in order to compensate for the increased risk that the issuer may default on the loan.

Capital Gains
Profits/losses from the sale of securities. In a mutual fund, profits are distributed to shareholders, based on the number of fund shares owned. For retirement accounts, these distributions will usually be invested in additional fund shares automatically.

Compounding
The process by which your investment gains value at an ever-increasing rate. It’s based not only on earnings from your original investment, but also on the additional earnings from distributions you previously received and used to purchase additional shares of your investment.

Diversification
Investing in many securities or among asset classes (see asset allocation). A strategy for reducing the impact on your portfolio of poor performance by any one security or type of asset.

Equities (see Stocks)

Fixed-Income Securities (see Bonds)

Income
Dividends or interest distributed by stocks or bonds to investors.

Inflation
A general increase in the price of goods and services, which means a decrease in your money’s buying power. If inflation is rising at 3%, and your investments earn an 8% return, the purchasing power of your money is actually growing by only 5% (8% minus 3%). If your investments are earning a rate of return lower than the rate of inflation, your money is losing purchasing power.

Money Market Instruments and Funds
Various kinds of short-term, uninsured debt obligations or loans to companies or government entities. Unlike other kinds of mutual funds, a money market fund tries to maintain a constant value of $1.00 per share, although it is not guaranteed; interest will go up or down depending on rates being paid by its current holdings.

Mutual Fund
A company that pools the money of many investors; professional managers invest this money in a portfolio of securities according to the fund’s specific objective. The mutual fund issues shares to investors representing a percentage of ownership in the underlying assets. Shares are redeemable by the investor at their current net asset value (which may be more or less than their original cost).

Risk
There are different types of risk. Investment risk refers to the possibility that an investment can lose some or all of its value, whether because of changes in general economic or market conditions (such as interest-rate changes) or because of events affecting a particular company/issuer. Particularly important for retirement investors to keep in mind are the risk of inflation eating away at the value of their money over time, and the risk of not growing a large enough nest egg to fund their retirement.

Stocks and Stock Funds
A share of ownership in a company. The potential benefits of owning stock include: dividend income (where a company distributes a portion of its profits to shareholders), and capital appreciation (when the price of a stock increases). Stock funds primarily own stocks, but may hold some bonds or money market instruments.

Total Return
A measurement of investment performance. A mutual fund’s total return includes any increase/decrease in price and any distributions from either interest/dividends on the securities in the fund’s portfolio or capital gains/losses on the sale of any of the fund’s holdings at a gain/loss.

Volatility
The ups and downs in the value of your investment, which have a lesser effect over time. Usually, the higher the volatility of an investment, the higher the return. Examples of more volatile securities include small-company stocks, emerging market securities, and high-yield corporate bonds (sometimes called "junk bonds").