Sound investing takes more than returns
into account
Risk and return, 9/30/82–9/30/02
20

                                ...
A targeted blend captures higher
risk-adjusted returns
 High
                                         Same risk,
         ...
Sophisticated strategies incorporate
classes and subclasses
The basics

                                         Stocks: 6...
Asset allocation has provided protection
in volatile markets
12/31/72–12/31/74

30%

20%

10%
                          1....
Know your goals

Goal             Ideal time to start investing   Key considerations
Retirement       When you get your fi...
Make it work
Asset allocation #1: Aggressive

                             1982–2001
                             Number o...
Make it work
Asset allocation #2: Moderate

                            1982–2001
                            Number of do...
Make it work
Asset allocation #3: Conservative

                             1982–2001
                             Number...
How rebalancing works — an example
Initial allocation: 12/31/99   Ending allocation: 12/31/02




   Large cap stocks 35% ...
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  1. 1. Sound investing takes more than returns into account Risk and return, 9/30/82–9/30/02 20 15.56 15 13.19 9.67 10 5.80 4.82 5 0.57 0 Money market securities Government bonds Large cap stocks Annualized total return (%) Annualized standard deviation (risk) Past performance is no guarantee of future results. You cannot invest directly in an index. Large cap stocks are represented by the S&P 500 Index, 500 stocks chosen for market size, liquidity and industry group representation. Government bonds are represented by the Lehman Government Bond Index, comprised of U.S. government and government agency securities (other than mortgage securities) with maturities of one year or more. Money market securities are represented by the 3 -Month Treasury Bill Index. Standard deviation indicates how much an investment’s return has fluctuated over time, relative to its historical average return.
  2. 2. A targeted blend captures higher risk-adjusted returns High Same risk, more return Efficient frontier Expected return Same return, less risk Inefficient (less return, portfolio more risk) Low Risk Low High
  3. 3. Sophisticated strategies incorporate classes and subclasses The basics Stocks: 60% Bonds: 30% Cash: 10% The next level Large cap U.S. stocks: 30% Investment-grade corporate bonds: 10% Small cap U.S. stocks: 10% High yield bonds: 5% International stocks: 20% Cash: 10% Government bonds: 15% Asset allocations are for illustrative purposes only and do not constitute a recommendation.
  4. 4. Asset allocation has provided protection in volatile markets 12/31/72–12/31/74 30% 20% 10% 1.22% 0% -10% -11.99% -20% -20.80% -30% Large cap stocks Bonds 60% stocks/40% bonds
  5. 5. Know your goals Goal Ideal time to start investing Key considerations Retirement When you get your first job • Years until retirement • Company plans • Desired lifestyle in retirement College When each child is born • Age of child(ren) education • Public or private college • Current savings • Grandparent contributions New house As soon as you decide you • Size of mortgage may want to be an owner • Time horizon Rainy-day When you have some • Potential level of need fund savings accumulated • Other financial commitments Build a legacy As your career progresses • Tax implications for your heirs • Time horizon • Number of heirs
  6. 6. Make it work Asset allocation #1: Aggressive 1982–2001 Number of down years 3 Average loss in down years -4.51% Worst 1-year loss -7.80% Average annual total return 14.50% Stocks: 80% Bonds: 20%
  7. 7. Make it work Asset allocation #2: Moderate 1982–2001 Number of down years 2 Average loss in down years -1.04% Worst 1-year loss -2.06% Average annual total return 12.79% Stocks: 50% Bonds: 40% Cash: 10%
  8. 8. Make it work Asset allocation #3: Conservative 1982–2001 Number of down years 0 Average loss in down years N/A Worst 1-year loss N/A Average annual total return 10.98% Stocks: 30% Bonds: 40% Cash: 30%
  9. 9. How rebalancing works — an example Initial allocation: 12/31/99 Ending allocation: 12/31/02 Large cap stocks 35% Large cap stocks 26% Small cap stocks 25% Small cap stocks 24% International stocks 15% International stocks 10% Bonds 25% Bonds 40%

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