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Become familiar with the basics of investing. This can help you be better prepared to talk with your financial advisor - and to position your savings for the growth you need over time. Learn about:

- Investment asset classes
- Why diversifying your investment is important
- How to diversify
- Why you shouldn't be afraid of stocks and stock funds
- Using dollar-cost averaging

Investment asset classes
Generally speaking, stocks and stock funds are the portfolio powerhouse. While they expose your assets to higher short-term market risk, over time they may offer a way to stay ahead of inflation and to grow asset value. Here are some stock basics that can help you have a more productive conversation with your financial advisor:

• Stocks are also referred to as equities or equity investments.
• Capitalization or "cap" suggests both company size and market risk. Large-cap firms tend to be more financially stable and to grow more slowly than small-cap firms, which involve more market risk because they're less well established. However, small-caps can offer greater potential for asset growth over the long term. Mid-caps, as the name suggests, fall between the other two categories.
• "Growth" and "value" are two different stock-investment strategies. Growth funds typically invest in fast-growing companies. Generally, the value of a growth fund fluctuates more than does the value of the overall stock market. Value funds look for companies whose stock prices are, in the managers' belief, lower than they should be given the companies' prospects for success. 
•  Stock prices are affected by many variables -- the company's earnings, how well its industry is doing, whether it's in or out of favor with investors and those who influence investors, the economy, domestic and international politics, to name a few.

Bonds and bond funds differ from stocks in that, while they don't generally offer the kind of growth potential that stocks do, they can provide more stable income:

• Bonds are essentially loans taken for a particular period, or "maturity." At maturity, the bond issuer repays the original loan from investors. Short-term bonds have a maturity of between one and three years; intermediate-term, three to 10 years; and long-term, more than 10 years.
• Longer-term bonds generally offer higher interest income, and shorter-term bonds, less interest income.
• Bond credit quality refers to the potential that the bond issuer will be able to repay the original loan and to deliver interest payments. The highest credit rating is AAA; the lowest, D. So-called "junk bonds" are those with credit ratings lower than Baa (Moody's rating) or BBB (S&P or Fitch rating).
• Who issues the bond? Government bonds have a very low risk of defaulting (governments can always raise taxes to raise revenues to pay bond holders), so their credit quality is generally high. Corporate bonds are issued by companies, so they're more dependent on the company's ability to be successful and profitable.
• A bond's "coupon" refers to its interest rate.
• When a bond sells at a premium, the sale price is higher than the face value of the bond. When it sells at a discount, the price is lower than the face value.

Cash or stable-value investments include money market funds, U.S. Treasury bills, certificates of deposit (CDs), and "guaranteed" investment contracts (GICs). These investments are less likely to lose value than either stock or bond investments. However, they also have less potential to grow in value over time.

Please keep in mind that all investments involve a certain degree of risk. Although bonds are typically more stable in the short term than stocks, bonds are not stable-value investments and are affected by changes in the direction of interest rates. As interest rates rise, bond prices generally decline and vice versa.

Why diversifying your investment is important
In investing as in life, diversification suggests variety. Keeping your savings diversified simply means dividing assets among stock, bond, and cash funds.

The reason financial advisors recommend diversifying a portfolio is to help reduce risk.

• Different asset class prices and values tend not to move up and down in synch - bonds may be up when stocks are down, for example.
• Within the three broad asset classes, sub-asset classes may move differently from each other. For example, a small-cap stock or stock fund might do well at one time and a large-cap at another.

Having a diversified portfolio can reduce ups and downs in the overall value of your savings. And over time, a diversified investment can provide higher average annual returns than an all-cash or all-bond portfolio. It can also provide returns competitive with those of an all-stock investment, but without the volatility, as this illustration shows:

How to diversify
Most savers aren't investment professionals, and it's logical to believe you could make mistakes in diversifying an investment among stocks, bonds, and cash funds. However, an experienced financial advisor can provide valuable help. If you don't have an advisor, consider finding one. An easy way to do this is by using the Calvert Advisor Finder^TM.

To put diversification into perspective, pay attention to one fact and look at two sample portfolios:

The Fact: Studies have shown that, over time, roughly 90% of an investment portfolio's return is the result of overall asset allocation -- percentage of savings in stocks, bonds, and cash -- not particular funds held. 

 A portfolio's long-term performance is determined primarily by the distribution of  dollars among asset classes.

The combination of investments you choose should reflect the number of years  until you expect to draw on your investment, as well as your tolerance for market and inflation risk.

The Portfolios 
These two sample portfolios can give you a general idea of how allocation of investments among stock, bond, and cash funds might change based on time and risk: 

If you are 10 or more years from your savings goal, you should focus on growth investments such as stocks and stock mutual funds. These investments have the greatest potential to boost the value of your accounts. In order to reduce risk, more conservative investors may elect to invest a portion of assets in bond funds, which do not tend to fluctuate as much in price as do stock funds.

As you near your savings goal, you'll need to balance your expectations for growth with your need for capital preservation. For example, investing a portion of your retirement plan assets in money market or bond funds can help you maintain a more stable investment value for the portion of your investment you expect to draw on immediately. However, for a goal like college tuition, you need to keep remaining assets growing for some degree through the four-year college period.

For another general, top-level view of how time, attitudes toward market risk, and other variables can affect appropriate portfolio diversification, use Calvert's interactive Asset Allocator.

Of course, sample portfolios and the calculator are not meant to provide advice on your particular portfolio make-up. Talk with your financial advisor about this all-important investment decision.

Why you shouldn't be afraid of stocks and stock funds
The values of individual stocks can fluctuate like the weather -- up one day and down the next.  

• A bull market occurs when the stock market is performing well overall, reflecting rising stock prices.
• A bear market occurs when stocks decline in price.

Over the long term, the stock market has brought better returns to investors than have bonds or Treasury bills. True, T-bills are considered a very conservative investment, with less risk than stocks, because of their backing by the US government. However, stocks have historically generated stronger returns. This trend is shown in the chart below, which plots average annual total returns for ten-year periods ended December 31:

Using dollar-cost averaging
Dollar-cost averaging is a common defensive technique in which an investor makes regular, periodic purchases of a fixed-dollar amount of one or more individual securities or mutual fund shares.

Using this strategy means you're continually investing, regardless of fluctuating price levels, and you tend to see rewards over time, not immediately. This strategy can't, of course, guarantee a profit or safeguard an investor against losses. And, you should consider your financial ability to continue purchases through periods of high price levels.

The following table shows how the technique works:

*This table reflects hypothetical values.

The formula for determining the average dollar cost (or, the actual share price, taking all purchases into account) is:
COST (total $$ amount invested) / Number of Shares Purchased

By this formula, the average cost of the stock purchased above was: $1,400 / 119.75 = $11.69

It's easy to see the benefits of this strategy.