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Principles of Asset Allocation . Importance of Asset Allocation. Security Selection 5%. Asset Allocation 91%. Market Timing 2%. Other Factors 2%. Based on academic research conducted by Brinson, Beebower and Singer (Financial Analysts Journal,1986 and 1991).

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Principles of Asset Allocation


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    1. Principles of Asset Allocation

    2. Importance of Asset Allocation Security Selection 5% Asset Allocation 91% Market Timing 2% Other Factors 2% Based on academic research conducted by Brinson, Beebower and Singer (Financial Analysts Journal,1986 and 1991).

    3. Three Components in Determining Allocation of Assets Component #1 Asset Class Rates of Return

    4. Asset Class Relationships SpecialtyStocks SpecialtyStocks Commodities Commodities Small Cap Stock Small Cap Stock Mid Cap Stock Mid Cap Stock Volatility Foreign Stock Foreign Stock Specialty Bonds Specialty Bonds Foreign Bonds Foreign Bonds Large Cap Stock Large Cap Stock Real Estate Real Estate Corporate Bonds Corporate Bonds Government Bonds Government Bonds This is designed to show general long-term relationships, as opposed to specific results. Actual volatility achieved will likely vary.

    5. Cumulative Long-term Returns (80+ Years) Based on cumulative index total returns 1926-2011. Source: Ibbotson Associates, U.S. Bureau of Labor Statistics.

    6. Short-Term (1-Year) Returns (%) Based on single year index total returns. Source: Ibbotson Associates, Morningstar.

    7. Three Components in Determining Allocation of Assets Component #2 Asset Class Volatility (“Standard Deviation”)

    8. Distribution of Returns by Asset Class Histograms show frequency distributions of returns by range, based on index annual returns 1926-2011. Source: Ibbotson Associates, Morningstar.

    9. Reduction of Risk Over Time One Year Holding Period Five Year Holding Period Ten Year Holding Period Twenty Year Holding Period Ranges show historic highest and lowest return achieved based on index rolling return periods 1926-2011. Source: Ibbotson Associates, Morningstar.

    10. Three Components in Determining Allocation of Assets Component #3 Relative Volatility of the Asset Classes (“Correlation”)

    11. Correlations Positive Correlation Negative Correlation Correlation refers to how closely the returns of two distinct assets move relative to each other. Positive correlation implies a strong linear relationship, while negative correlation signifies weak one.

    12. Correlations of Asset Classes Long-term correlations calculated based on annual index returns (1972-2011). Source: Ibbotson Associates, Morningstar.

    13. Putting It All Together Minimize volatility by combining different classes of assets

    14. Diversifying Risk 100% Stocks 50% Stocks / 50% Bonds 75% Stocks / 25% Bonds 25% Stocks / 75% Bonds Return 100% Bonds Risk Based on long-term index total returns and standard deviations (1926-2011). Source: Ibbotson Associates, Morningstar.

    15. Diversifying Risk Addition of Real Estate and Commodities Return Stocks and Bonds Risk Based on long-term index total returns and standard deviations (1972-2011). Source: Ibbotson Associates, Morningstar.

    16. Disclosures Indexes used in analysis: Stocks (broad asset class): Standard & Poor’s 500 Composite Index (1926-2011)Bonds (broad asset class): Ibbotson Long-Term U.S. Government Bond Series (1926-1985), Barclays Capital U.S. Aggregate (1986-2011) Long-Term Government Bonds: Ibbotson Long-Term U.S. Government Bond Series (1926-2011) Long-Term Corporate Bonds: Ibbotson Long-Term U.S. Corporate Bond Series (1926-2011) Large Cap Stocks: Standard & Poor’s 500 Composite Index (1926-2011) Small Cap Stocks: Ibbotson Small Company Return Series/CRSP Deciles 6-10 (1926-2011) International Stocks: Morgan Stanley Capital International – Europe, Australia & Far East Index (1972-2011) International Bonds: Citi/Salomon Non-Dollar World Government Bond Index (1985-2011)Real Estate: National Association of Real Estate Investment Trusts – Equity REIT Index (1972-2011)Commodities: S&P/Goldman Sachs Commodities Index (1972-2011) Inflation: Consumer Price Index for Urban Consumers (CPI-U) (1926-2011) On the efficient frontier slides: ‘Return’ represents average annualized total returns of different combinations of market indexes (on the vertical axis). These consist of monthly total returns that are chained geometrically, and include both price appreciation and dividends. ‘Risk’ is represented by annualized standard deviation of monthly returns of combined market index portfolios (and are displayed on the horizontal axis). Index performance is provided as a benchmark but is not illustrative of any particular investment. An investment cannot be made in an index. Market indexes do not include expenses, which are deducted from fund returns. The performance data shown represents past performance, which is not a guarantee of future results. Investment returns and principal value will fluctuate, so that investors' shares, when sold, may be worth more or less than their original cost.