The asset-allocation decision is one of the most important factors in determining both the return and the risk of an investment portfolio. Asset allocation is the process of developing a diversified investment portfolio by combining different assets in varying proportions. An asset is anything that produces income or can be purchased and sold, such as stocks, bonds, or certificates of deposit (CDs).

1. Portfolio Diversification
Tom DeVol, Registered Representative
Sammons Securities, LLC
62 Harding Street, Newton, MA 02465
617.964.6404
Securities offered through Sammons Securities Company, Member FINRA/SIPC
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2. What is Asset Allocation?
Asset allocation is the
process of combining asset
classes such as stocks,
bonds, and cash in a
portfolio in order
to meet your goals. Stocks Bonds
Cash
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3. Stock Diversification
Risk
• Company risk
• Market risk
1 2 4 6 8 16 30 50 100 1,000
Number of stocks in portfolio
Past performance is no guarantee of future results. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an
index.
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4. Potential to Reduce Risk or Increase Return
1970–2010
Fixed income portfolio Lower risk portfolio Higher return portfolio
• Stocks
15% 19% 12% • Bonds
27% • Cash
36%
85% 45% 61%
Return: 8.0% Return: 8.0% Return: 8.9%
Risk: 7.8% Risk: 5.8% Risk: 7.8%
Past performance is no guarantee of future results. Risk and return are measured by standard deviation and compound annual return, respectively. They are based on
annual data over the period 1970–2010. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index.
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5. The Case for Diversifying
2001–2010
30%
Return
20
10
0
–10
–20
Compound annual return
• Bonds 6.6%
• 50/50 portfolio 5.2
–30 • Stocks 1.4
–40
Year 2 3 4 5 6 7 8 9 10
1
 Past performance is no guarantee of future results. Time period illustrated is from 2001–2010. This time period was chosen as a dramatic illustration of stock and bond
return behavior and how their often opposite movements reduced portfolio volatility. This is for illustrative purposes only and not indicative of any investment. An investment
cannot be made directly in an index.
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6. Stocks and Bonds: Risk Versus Return
1970–2010
12%
Return
Maximum risk
portfolio:
11 100% Stocks
80% Stocks,
60% Stocks, 20% Bonds
40% Bonds
50% Stocks,
50% Bonds
10 Minimum risk portfolio:
28% Stocks,
72% Bonds
100%
Bonds
9 Risk
10% 11 12 13 14 15 16 17 18 19
Past performance is no guarantee of future results. Risk and return are measured by standard deviation and arithmetic mean, respectively. This is for illustrative purposes
only and not indicative of any investment. An investment cannot be made directly in an index.
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7. More Funds Do Not Always Mean
Greater Diversification
Identifying potential security overlap
Equity Equity
portfolio A portfolio B
Deep-value Core-value Core Core-growth High-growth Deep-value Core-value Core Core-growth High-growth
Giant
Giant
Large
Large
Mid
Mid
Small
Small
Micro
Micro
Past performance is no guarantee of future results. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an
index. © 2011 Morningstar. All Rights Reserved. 3/1/2011
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8. Asset-Class Winners and Losers
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Highest 23.0 33.4 28.6 29.8 21.5 22.8 17.8 60.7 20.7 14.0 26.9 11.6 25.9 32.5 31.3
return
17.6 22.8 20.3 27.3 5.9 3.8 1.6 39.2 18.4 7.8 16.2 9.9 1.6 28.1 15.1
10.3 15.9 13.1 21.0 0.6 3.7 –6.5 28.7 12.0 7.3 15.8 5.5 –20.7 26.5 13.6
6.4 15.9 12.2 14.3 –3.6 –0.8 –13.3 24.8 10.9 5.7 12.9 5.4 –36.7 14.0 10.1
5.2 5.3 4.9 4.7 –9.1 –11.9 –15.7 1.4 8.5 4.9 4.8 4.7 –37.0 0.1 8.2
–0.9 2.1 –7.3 –9.0 –14.0 –21.2 –22.1 1.0 1.2 3.0 1.2 –5.2 –43.1 –14.9 0.1
Lowest
return
• Small • Large • International • Long-term government • Treasury • Diversified
stocks stocks stocks bonds bills portfolio
Past performance is no guarantee of future results. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an
index.
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9. Correlation Can Help Evaluate Potential
Diversification Benefits
Asset-class correlation 1926–2010
Small Large LT corporate LT govt IT govt Treasury
stocks stocks bonds bonds bonds bills
Small stocks 1.00
Large stocks 0.79 1.00
LT corporate bonds 0.07 0.17 1.00
LT govt bonds –0.07 0.03 0.89 1.00
IT govt bonds –0.10 –0.01 0.88 0.90 1.00
Treasury bills –0.10 –0.01 0.19 0.22 0.46 1.00
Past performance is no guarantee of future results. Correlation ranges from –1 to 1, with –1 indicating that the returns move perfectly opposite to one another, 0 indicating
no relationship, and 1 indicating that the asset classes react exactly the same. This is for illustrative purposes only and not indicative of any investment. An investment cannot be
made directly in an index.
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10. Diversification in Bull and Bear Markets
Bull market Bear market
$2,500 $1,500
• Stocks
• 50/50 portfolio
• Bonds
$2,0
84
2,000 1,250
$1,160
$1,6
53
1,500 1,000
$1,2
74
$767
1,000 750
500 $491 500
Oct Oct Oct Oct Oct Oct Nov Nov
2002 2003 2004 2005 2006 2007 2007 2008
Past performance is no guarantee of future results. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an
index.
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11. Diversified Portfolios in Various Market Conditions
Performance during and after select bear markets
$1,250 Mid-1970s recession (Jan 2007 bear market and aftermath
1973–Jun 1976) (Nov 2007–Dec 2010)
$1,150
• Stocks $1,072
• Diversified portfolio
$1,014
1,000
$872
750
500
250 Jan Jan Jan Jan Nov Nov Nov Nov
1973 1974 1975 1976 2007 2008 2009 2010
Past performance is no guarantee of future results. Diversified portfolio: 35% stocks, 40% bonds, 25% Treasury bills. Hypothetical value of $1,000 invested at the beginning
of January 1973 and Nov 2007, respectively. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index.
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12. Glossary of Indices
The indices are presented to provide you • Lehman Brothers Government/Credit Lehman Brothers Treasury Bond
with an understanding of their historic Intermediate Index: Non-securitized Index: Composed of all US Treasury
component of the U.S. Aggregate Index. publicly issued obligations. Includes only
long-term performance, and are not The Lehman Brothers Government/Credit notes and bonds with a minimum
presented to illustrate the performance of Intermediate Index includes Treasuries, outstanding principal amount of $50
any security. Investors cannot directly Government-Related issues and USD million and a minimum maturity of one
purchase an index. Past performance is Corporates with remaining maturities year. Flower bonds are excluded. Total
not indicative of future results. Individual between 1 to 9.99 years. return comprises price appreciation/
depreciation and income as a percentage
investor results will vary. Lehman Brothers US Government of the original investment.
Long-Term Index: Non-securitized
 Citigroup WGBI Non-US Index: component of the U.S. Aggregate Index • Lehman Brothers Investment Grade
Unhedged is a subset of the WBGI index includes Treasuries (maturities greater Corporate Index: The U.S. Corporate
that includes Domestic Sovereign issued than 10 years), Government-Related Index covers USD-denominated,
debt of Australia, Austria, Belgium, issues, and USD Corporates. investment grade, fixed rate, taxable
securities sold by industrial, utility and
Canada, Denmark, Finland, Germany, Lehman Brothers Corporate – Long financial issuers. It includes publicly U.S.
Greece, Ireland, Italy, Japan, the Term Bond Index: A subset of the corporate and foreign debentures and
Netherlands, Norway, Poland, Portugal, Lehman Brothers Corporate Bond Index secured notes that meet specified
covering all corporate, publicly issued, maturity, liquidity, and quality
Singapore, Spain, Sweden, Switzerland,
fixed-rate, nonconvertible US debt issues requirements. Securities in the index roll
and the United Kingdom. rated at least Baa with at least $50 up to the U.S. Credit and U.S. Aggregate
million principal outstanding and maturity indices. The U.S. Corporate Index was
 MSCI EAFE: The MSCI EAFE® Index
greater than 10 years. launched on January 1, 1973.
(Europe, Australasia, Far East) is a free-
float-adjusted market capitalization index
that is designed to measure developed
market equity performance, excluding the
US & Canada.
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13. Glossary of Indices
(continued from previous page)
 Lehman Brothers Mortgage- • Merrill Lynch US Treasury Bill Index: • Russell 1000 Growth Index: Measures
Backed Securities Index: The LB The Merrill Lynch US Treasury Bill Index the performance of those companies in
tracks the performance of USD the Russell 1000 Index with higher price-
Mortgage-Backed Securities Index denominated US Treasury Bills publicly to-book ratios and higher forecasted
includes 15 and 30 year fixed rate issued in the US domestic market. growth values.
securities backed by mortgage pools Qualifying securities must have at least
Russell Mid Cap Index: Measures the
one month remaining term to final
•
of the Government National Mortgage performance of the 800 smallest
Association (GNMA), Federal Home maturity and a minimum amount
outstanding of USD 1 billion. companies in the Russell 1000 Index,
Loan Mortgage Corporation (FHLMC), which represents approximately 30% of
and Federal National Mortgage • Russell 2000 Value Index: Measures the total market capitalization of the
the performance of those Russell 2000 Russell 1000 Index.
Association (FNMA).
companies with lower price-to-book ratios
Russell 1000 Value Index: The Russell
and lower forecasted growth values.
•
 Lehman Brothers High Yield: The 1000 Value Index measures the
Lehman Brothers Corporate High- • Russell 2000 Growth Index: Measures performance of companies in the Russell
Yield Index covers the USD the performance of those Russell 2000 1000 Index with lower price-to-book
companies with higher price-to-book ratios and lower forecasted growth values
denominated, non-investment grade,
ratios and higher forecasted growth
fixed-rate, taxable corporate bond values. • S&P 500 Index: The S&P 500 Index
market. Securities are classified as consists of 500 stocks chosen for market
size, liquidity, and industry group
high-yield if the middle rating of
representation. It is a market-value-
Moody’s, Fitch, and S&P is Ba1/BB+/ weighted index, with each stock's weight
BB+ or below. A small number of in the Index proportionate to its market
unrated bonds are included in the value. The "500" is one of the most
index. The index excludes Emerging widely used benchmarks of U.S. equity
performance.
Markets debt.
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14. Important Disclosures
Asset Allocation: Asset allocation cannot eliminate the risk of fluctuating prices and uncertain returns.
Fixed Income Securities: Investing in fixed income securities involves certain risks such as market risk if sold prior to maturity and credit risk especially if investing in high
yield bonds, which have lower ratings and are subject to greater volatility. All fixed income investments are subject to availability and change in price and may be worth less
than original cost upon redemption or maturity. In addition to market risk, there are certain other risks associated with an investment in fixed income funds, such as default
risk, the risk that the company issuing debt securities will be unable to repay principal and interest, and interest rate risk, the risk that the security may decrease in value if
interest rates increase.
International/Emerging Market Securities or Funds: Investing in international securities or funds that invest in these securities takes on special risk. These risks include, but
are not limited to, currency risk, political risk, and risk associated with varying accounting standards. Investing in emerging markets normally accentuates these risks.
Sector Funds or Portfolios: he investor should note that funds or portfolios that invest exclusively in one sector or industry carry additional risks. The lack of industry
diversification subjects the investor to increased industry specific risks.
Non-Diversified Funds or Portfolios: Non-Diversified Funds or Portfolios that invest more of their assets in a single issuer involve additional risks, including share price
fluctuations, because of increased concentration of investments.
Small Cap Securities or Funds: The prices of small- and mid-cap company stocks are generally more volatile than large company stocks. They often involve higher risks
because small- and mid-cap companies may lack the management expertise, financial resources, product diversification and competitive strengths to endure adverse
economic conditions.
High Yield Bonds or Bond Funds: Investing in lower rated debt securities (commonly referred to as junk bonds) or funds that invest in such securities involves additional risk
because of the lower credit quality of the security or fund portfolio. These securities or funds are subject to a higher level of volatility and increased risk of default, or loss of
principal. In addition to market risk, there are certain other risks associated with an investment in a convertible bond, such as default risk, the risk that the company issuing
debt securities will be unable to repay principal and interest and interest rate risk, the risk that the security may decrease in value if interest rates increase.
Real Estate Investment Trusts (REITS): Investing in REITS involves special risks, including the potential for illiquidity of REIT securities if they are not listed on an exchange.
REITS have limited historical data and their historical behavior has varied over time.
Government Bonds and Treasury Bills are guaranteed by the U.S. Government, and if held to maturity, as with all bonds offer a fixed rate of return and principal.
Stocks are not guaranteed, represent ownership in a company and offer long term growth potential but may fluctuate more and provide less current income than other
investments.
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15. Important Disclosures
Securities and Insurance Products:
NOT INSURED BY FDIC OR ANY MAY LOSE VALUE NOT A DEPOSIT OF OR GUARANTEED BY A BANK OR
FEDERAL GOVERNMENT AGENCY ANY BANK AFFILIATE
Accounts carried by First Clearing, LLC, member New York Stock Exchange and SIPC.
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