Five key principles of long-term investing

Asset class: a group of securities that have similar characteristics and values that tend to move in the same direction as other securities of the same class. The main asset classes are equities (stocks), fixed-income investments (such as bonds) and cash equivalents (including short-term certificates of deposit and U.S. Treasury bills).
Asset allocation: the way your investment portfolio is divided among the different asset classes.

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If you have a major, long-term financial goal — such as paying for college tuition, buying a home or saving for retirement — saving and investing for those goals now should be among your highest priorities. Keep these five key principles in mind as you plan and carry out your investment strategy.

1. Mind your asset allocation

All investments fall into categories known as asset classes. The most widely used asset classes are:

  • Cash equivalents, including bank savings accounts, short-term certificates of deposit or CDs, U.S. Treasury bills and money market funds
  • Fixed-income investments, including bonds and bond funds
  • Equities, which include individual stocks and mutual funds investing in stocks

Each asset class has its own risk and return profile based on past performance. Generally speaking, cash equivalents pose the least risk but also offer the lowest returns, equities pose the most risk but offer the highest potential returns, and fixed-income investments fall between the risk and return levels of the other two asset classes.

The way your investment portfolio is divided among the different asset classes is called your asset allocation, and it is key to achieving your goals. It’s up to you to choose, with professional advice if you prefer, an appropriate asset allocation based on your goals, your time horizon for achieving them, the level of return you’d like to get, and your tolerance for risk.

2. Stay diversified

When it comes to investing for your future, putting all your eggs in one basket may present long-term challenges. When you leave your savings in just a few similar investments, you could be putting your money at too much risk or missing out on opportunities to improve your returns. You’re much better off diversifying — spreading your savings around a large enough quantity and variety of investments so that a significant loss on any one investment or segment of your portfolio will be less likely to drag down your entire portfolio.

Diversification begins with dividing your savings among different asset classes, and many people believe that is enough. But to truly manage risk and maximize returns, consider dividing your savings among a variety of investments within each asset class you’ve chosen. There are, for example, ample opportunities to diversify within equities. Investing in both large-cap stock funds (those owning mostly stocks of larger, well-established companies) and small-cap stock funds (those investing mostly in smaller, newer companies with the potential for rapid growth) enhances your diversification, as does investing in both domestic and international stock funds.

3. Don’t try to time the market

"Market timing" is the practice of intentionally moving your savings in and out of equities in an attempt to capture only the performance highs and avoid the lows. It’s extremely risky, and even the most experienced investment professionals find it challenging. By nature, stock prices go through short-term ups and downs. If you pull out of stocks during a down period, you may well lose the opportunity to share in gains when prices go back up again. Remember, historically, the stock market has always eventually recovered from a broad slump.

Don’t let short-term volatility in equities or any other asset class distract you from staying on the path toward your long-term goals.

4. Don’t miss out on dollar-cost averaging

When you contribute on a regular basis to a savings and investment account — whether it’s an account in your workplace savings plan or one you have opened either on your own or through a broker — you automatically let your savings take part in dollar-cost averaging. With dollar-cost averaging in play, market volatility may actually work to your advantage by enhancing your investment return.

Dollar-cost averaging kicks in when you buy a fixed dollar amount of a particular investment at regular intervals, regardless of the direction markets are going in. When the investment’s price declines, you get more shares for the money you invest, which, over time, can lower your average cost per share. And the lower your cost to invest, the greater your potential rate of return.

For example, in your workplace savings plan, you purchase $100 of Fund X each month for three months. In July, the price per share is $10, so you buy 10 shares. In August, each share is priced at $25, so you buy four shares. In September, each share goes for $10, so you buy 10 shares. During the three-month period, the average price per share was $15.00 ($10 plus $25 plus $10 equals $45, and $45 divided by 3 is $15.00). But your average cost per share was only $12.50 (your $300 total investment divided by the 24 total shares you purchased comes to $12.50). You paid less than the average price per share because you were able to buy more shares during the months when they cost less.

Bear in mind that dollar-cost averaging cannot by itself guarantee you a profit or protect you against the risk of loss. But it can serve as a way to keep your long-term savings and investing growing.

5. Revisit your portfolio at least once a year

You should take a fresh look at your portfolio at least annually, particularly to make sure it still reflects your intended asset allocation. Because different assets produce different results as financial markets fluctuate, your portfolio might drift away over time from the allocation you set up previously. For example, let’s say you started with a mix of 70% equities and 30% fixed-income investments, but now it’s a year later, and your portfolio is composed of 65% equities and 35% fixed-income investments. To return to your original 70/30 allocation, you can "rebalance" your portfolio by transferring balances from fixed-income investments to equities. Or you can choose to direct more of your future contributions into equities to get back to your target asset allocation.

It also makes sense to rethink your asset allocation whenever your life circumstances change significantly due to an event like a large pay increase, marriage, the birth of a child, or divorce. As time progresses, you might end up deciding to take less risk with your investments or even choosing to take on more risk, depending on your preferences and what’s been happening in your life. You may also choose to revise the level of investment return you will target.

In addition to monitoring your asset allocation, make sure your portfolio stays diversified enough to maintain the risk level you’re comfortable with.

Diversification is a technique to help reduce risk. There is no absolute guarantee that diversification will protect against a loss of income.

Dollar-cost averaging does not assure a profit or protect against a loss in declining markets. Because such a strategy involves periodic investment, you should consider your financial ability and willingness to continue purchases through periods of low price levels.

You should consider the investment objectives, risks, charges and expenses carefully before investing. Please call 877 518-9161, or go to for a current prospectus that contains this and other information. Please read the prospectus carefully before investing.

TIAA-CREF Individual & Institutional Services, LLC and Teachers Personal Investors Services, Inc., members FINRA, distribute securities products.

©2012 Teachers Insurance and Annuity Association-College Retirement Equities Fund, New York, NY 10017

© 2014 and prior years, Teachers Insurance and Annuity Association - College Retirement Equities Fund (TIAA-CREF), New York, NY 10017