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A Newsletter for the State of Connecticut Deferred Compensation Plan

	Terms You Should Know When investing for retirement, you need to be familiar with the buzz words and terms used in today's increasingly investment-savvy world. This issue of Getting There is designed to familiarize you with some commonly used investment and financial terms.
State Comptroller Nancy Wyman

Asset Class - a group of investments that share similar financial characteristics. There are three broad asset classes: stocks, bonds, and cash and/or cash equivalents.

Balanced Fund - A mutual fund designed to generate current income as well as achieve long-term growth without unnecessary exposure to risk. These funds (sometimes called hybrid funds) usually invest in a combination of bonds, common stocks and preferred stocks. The purpose of a balanced fund is to provide an investor with a single mutual fund that combines both growth and income objectives by investing in stocks (for growth) and bonds (for income).

Bear Market - A prolonged period when stock or bond prices, or both, fall. Some causes of a bear market include a recession, high unemployment, or rapidly rising inflation.

Benchmark - A standard that is used for comparison. Mutual funds have benchmarks against which a fund's investment performance is compared. For example, funds that invest in large-company stocks use the S&P 500 Index as a benchmark, since the S&P 500 measures the stock performance of the largest 500 companies in the U.S. stock market. By comparing a mutual fund's investment performance to an Index that is composed of funds with similar investment objectives and goals, you can determine if the fund is over- or under-performing.

Bonds - Bonds represent a loan to a government or corporation and generally offer steady, fixed income and medium risk. Bond portfolios make money because the organization that receives the loan promises to pay a stated rate of interest to the fund.

Bull Market - A prolonged period when stock or bond prices, or both, rise faster than their historical average.

Cash and Cash Equivalents - Cash is represented by short-term investments, such as money market accounts and certificates of deposit. Cash is the lowest risk asset class.

Common Stock - Stock represents ownership in a corporation. Common stock is a share of ownership that entitles you to a profit if:

• you sell the stock for more than you paid, or,
• the company passes some of its earnings to you in the form of dividend payments.

Compounding - The process by which an investment's value increases over time through interest income on previously earned interest. For example, if you put $1,000 into a savings account today and it earns 5% annually in interest, at year's end you would have $1,050 (5% annual rate of return for $1,000 is $1,000 x .05 = $50). If you kept that money in the account for another year at a 5% annual rate of return, you would earn $52.50 in interest, because during the second year, you earn 5% interest on your entire account balance of $1,050 (your original deposit plus the interest it earned in the first year). The longer you keep your money in the account, the more opportunity there is for it to grow through compounding.

Diversification - A strategy designed to reduce exposure to risk by combining a variety of investment instruments, such as various types of stocks, bonds, and other investments. Diversification reduces the potential for dramatic gains and losses, allowing for a more consistent performance under a wide range of economic conditions. The rationale is that in a certain financial climate, one asset class may perform poorly while another asset class is doing well. By diversifying your savings, you're lowering your chance of being hurt by the poor performance of any single asset class. Mutual funds are one of the easiest ways to diversify, since each fund invests in a variety of stocks and/or bonds.

Dollar-Cost Averaging - An investment strategy that can help protect investors against market volatility. You invest a fixed amount of money at regular intervals, regardless of market conditions. For example, let's say you invest $50 on the first day of every month. You will buy more shares when the price is low and fewer shares when the price is high. This strategy is effective if the underlying stock price rises over a long period of time.

Income Replacement Ratio - The percentage of your pre-retirement income you will need to maintain your standard of living during retirement. Generally, the target income replacement ratio is equal to 60% to 90% of your salary during your last year of work.

Index Fund - A mutual fund designed to match the performance of a specific index, such as the S&P 500.

Mutual Fund - A fund operated by an investment company that pools the money of its shareholders to purchase a variety of investment vehicles, including stocks and bonds. There are many types of mutual funds, including aggressive growth funds, balanced funds and capital appreciation funds.

Preferred Stock - A class of stock that pays a fixed dividend that was set when it was issued. Preferred stock generally pays less income than bonds of the same company and does not have the price appreciation potential of common stock. Preferred stockholders, however, always receive their dividends first, and in the event the company goes bankrupt, preferred shareholders are paid off before common stockholders.

Prospectus - A legal document that provides information about a mutual fund, such as its investment objectives, performance history, fees and what it may and may not invest in.

Stocks - Stocks represent ownership in a company and generally offer the best growth opportunity over the long term, as well as the highest risk. Stock portfolios make money by sharing in the companies' profits (in the form of cash dividends) and/or through capital appreciation (in the form of an increase in the stock price).

Unrealized Gain - An investment you currently hold that has increased in value since you purchased it has an unrealized gain (because the gain is on paper only). Once you sell the investment and receive a profit, the gain becomes realized.

Unrealized Loss - An investment you currently hold that has decreased in value since you purchased it. Once you sell the investment at a loss, the loss becomes realized.

Investment Fund Performance & Operating Fees

For the Period Ending December 31, 2004

You may invest your contributions with any one of the Plan's three financial services organizations: The Hartford, ING Financial Advisers, LLC (member SIPC), and Phoenix Investment Partners.

The following charts will help you evaluate your investment choices. They show the historical rates of return for each financial services organization's available investment options and the various operating fees that may be assessed against these options for the period ending December 31, 2004.

The rates of return columns are "net of expenses" and reflect the actual returns that would be applied to your account. This means that they already exclude the operating expenses a financial services organization may charge you for managing, investing or marketing a particular investment option. Operating expenses appear in separate columns.

Results are historical and not intended to portray future performance. Current performance may be less than figures shown.

Please note that investment benchmarks may differ from the benchmarks provided in the funds' prospectuses.

About Your Fund Choices

When comparing two similarly styled mutual funds, be sure to:

• Recognize that while a fund's past performance may help you understand how well or poorly it has performed over a period of time, it is no guarantee of future results.
• Consider the total expenses each fund charges as well as the kinds of services or benefits it provides. Keep in mind that you can reduce your overall investing costs by monitoring these expenses and taking them into account in your investment selection process.

1 The Declared Rate is credited through the close of the calendar year on contributions received during the designated quarter. The rate for the first quarter 2005 is 3.90%. For contributions received prior to January 1, 2005, the Declared Rate is 3.90%. Rates quoted are effective annual yields.

1 The later fund listed was replaced with the applicable ING Partners, Inc. Portfolio (the first fund listed). For most plans this occurred after the close of business on December 3, 2004. The performance shown is based on the performance of the replacement fund until December 3, 2004, and the performance of the applicable ING Partners, Inc. Portfolio after that date. The replaced fund may not have been available under all contracts.

2 The Declared Rate as of January 2005 is 3.70%, expressed as an annual effective yield, and is guaranteed not to drop below 3.35% through December 31, 2005.

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