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Portfolio DiversificationTom DeVol, Registered RepresentativeSammons Securities, LLC62 Harding Street, Newton, MA 02465617...
What is Asset Allocation?      Asset allocation is the      process of combining asset      classes such as stocks,      b...
Stock Diversification        Risk                                                                                         ...
Potential to Reduce Risk or Increase Return    1970–2010           Fixed income portfolio Lower risk portfolio            ...
The Case for Diversifying     2001–201030%Return20100–10–20                                                               ...
Stocks and Bonds: Risk Versus Return     1970–201012%Return                                                               ...
More Funds Do Not Always Mean        Greater Diversification        Identifying potential security overlap        Equity  ...
Asset-Class Winners and Losers          1996       1997       1998       1999       2000      2001       2002       2003  ...
Correlation Can Help Evaluate Potential    Diversification Benefits    Asset-class correlation 1926–2010                  ...
Diversification in Bull and Bear Markets        Bull market                                                               ...
Diversified Portfolios in Various Market Conditions    Performance during and after select bear markets$1,250             ...
Glossary of IndicesThe indices are presented to provide you       •    Lehman Brothers Government/Credit                 L...
Glossary of Indices(continued from previous page)    Lehman Brothers Mortgage-              •    Merrill Lynch US Treasur...
Important DisclosuresAsset Allocation: Asset allocation cannot eliminate the risk of fluctuating prices and uncertain retu...
Important DisclosuresSecurities and Insurance Products:NOT INSURED BY FDIC OR ANY                MAY LOSE VALUE         NO...
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Portfolio Diversification

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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).

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Portfolio Diversification

  1. 1. Portfolio DiversificationTom DeVol, Registered RepresentativeSammons Securities, LLC62 Harding Street, Newton, MA 02465617.964.6404Securities offered through Sammons Securities Company, Member FINRA/SIPC CAR #0311-4659 (03/11)
  2. 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© 2011 Morningstar. All Rights Reserved. 3/1/2011 CAR #0311-4659 (03/11)
  3. 3. Stock Diversification Risk • Company risk • Market risk 1 2 4 6 8 16 30 50 100 1,000 Number of stocks in portfolioPast 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 anindex.© 2011 Morningstar. All Rights Reserved. 3/1/2011 CAR #0311-4659 (03/11)
  4. 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 onannual 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.© 2011 Morningstar. All Rights Reserved. 3/1/2011 CAR #0311-4659 (03/11)
  5. 5. The Case for Diversifying 2001–201030%Return20100–10–20 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 bondreturn behavior and how their often opposite movements reduced portfolio volatility. This is for illustrative purposes only and not indicative of any investment. An investmentcannot be made directly in an index.© 2011 Morningstar. All Rights Reserved. 3/1/2011 CAR #0311-4659 (03/11)
  6. 6. Stocks and Bonds: Risk Versus Return 1970–201012%Return Maximum risk portfolio:11 100% Stocks 80% Stocks, 60% Stocks, 20% Bonds 40% Bonds 50% Stocks, 50% Bonds10 Minimum risk portfolio: 28% Stocks, 72% Bonds 100% Bonds9 Risk 10% 11 12 13 14 15 16 17 18 19Past performance is no guarantee of future results. Risk and return are measured by standard deviation and arithmetic mean, respectively. This is for illustrative purposesonly and not indicative of any investment. An investment cannot be made directly in an index.© 2011 Morningstar. All Rights Reserved. 3/1/2011 CAR #0311-4659 (03/11)
  7. 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-growthGiant GiantLarge LargeMid MidSmall SmallMicro 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 CAR #0311-4659 (03/11)
  8. 8. Asset-Class Winners and Losers 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010Highest 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 31.3return 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 0.1Lowestreturn • 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. © 2011 Morningstar. All Rights Reserved. 3/1/2011 CAR #0311-4659 (03/11)
  9. 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 1.00Past 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 indicatingno 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 bemade directly in an index.© 2011 Morningstar. All Rights Reserved. 3/1/2011 CAR #0311-4659 (03/11)
  10. 10. Diversification in Bull and Bear Markets Bull market Bear market$2,500 $1,500 • Stocks • 50/50 portfolio • Bonds $2,0 842,000 1,250 $1,160 $1,6 531,500 1,000 $1,2 74 $7671,000 750500 $491 500 Oct Oct Oct Oct Oct Oct Nov Nov 2002 2003 2004 2005 2006 2007 2007 2008Past 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 anindex.© 2011 Morningstar. All Rights Reserved. 3/1/2011 CAR #0311-4659 (03/11)
  11. 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 $1,0141,000 $872750500250 Jan Jan Jan Jan Nov Nov Nov Nov 1973 1974 1975 1976 2007 2008 2009 2010Past performance is no guarantee of future results. Diversified portfolio: 35% stocks, 40% bonds, 25% Treasury bills. Hypothetical value of $1,000 invested at the beginningof 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.© 2011 Morningstar. All Rights Reserved. 3/1/2011 CAR #0311-4659 (03/11)
  12. 12. Glossary of IndicesThe indices are presented to provide you •  Lehman Brothers Government/Credit Lehman Brothers Treasury Bondwith 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 onlylong-term performance, and are not The Lehman Brothers Government/Credit notes and bonds with a minimumpresented to illustrate the performance of Intermediate Index includes Treasuries, outstanding principal amount of $50any security. Investors cannot directly Government-Related issues and USD million and a minimum maturity of onepurchase an index. Past performance is Corporates with remaining maturities year. Flower bonds are excluded. Totalnot indicative of future results. Individual between 1 to 9.99 years. return comprises price appreciation/ depreciation and income as a percentageinvestor 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 GradeUnhedged is a subset of the WBGI index includes Treasuries (maturities greater Corporate Index: The U.S. Corporatethat 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 andCanada, 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 andNetherlands, Norway, Poland, Portugal, Lehman Brothers Corporate Bond Index secured notes that meet specified covering all corporate, publicly issued, maturity, liquidity, and qualitySingapore, Spain, Sweden, Switzerland, fixed-rate, nonconvertible US debt issues requirements. Securities in the index rolland 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 indexthat is designed to measure developedmarket equity performance, excluding theUS & Canada. CAR #0311-4659 (03/11)
  13. 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 stocks 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. CAR #0311-4659 (03/11)
  14. 14. Important DisclosuresAsset 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 highyield 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 lessthan 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 defaultrisk, 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 ifinterest 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, butare 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 industrydiversification 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 pricefluctuations, 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 risksbecause small- and mid-cap companies may lack the management expertise, financial resources, product diversification and competitive strengths to endure adverseeconomic 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 riskbecause 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 ofprincipal. 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 issuingdebt 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 otherinvestments. CAR #0311-4659 (03/11)
  15. 15. Important DisclosuresSecurities and Insurance Products:NOT INSURED BY FDIC OR ANY MAY LOSE VALUE NOT A DEPOSIT OF OR GUARANTEED BY A BANK ORFEDERAL GOVERNMENT AGENCY ANY BANK AFFILIATEAccounts carried by First Clearing, LLC, member New York Stock Exchange and SIPC. CAR #0311-4659 (03/11)

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