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Wealth Management

Structured Asset Approach

DIVERSIFICATION

Diversification and Portfolio Risk – 1952
Harry Markowitz, University of Chicago - 1990 Nobel Prize in Economics
  • Diversification reduces risk
  • Assets should be evaluated not by individual characteristics but by their effect on a portfolio
  • An optimal portfolio can be constructed to maximize return for a given risk level

 

Structured Investing Approach

Combine Multiple Asset Classes
  • Seek to combine multiple asset classes that have historically experienced dissimilar return patterns across various financial and economic environments. Diversification does not guarantee a profit or protect against a loss
Diversify Globally
  • More than 53% of global stock market value is non-U.S., and international stock markets as a whole have historically experienced dissimilar return patterns to the U.S.
Invest in Thousands of Securities
  • Compared to a portfolio concentrated in a small number of securities, investing in thousands of securities around the world can limit portfolio losses during a severe market decline by reducing company- specific risk
Invest in High-Quality, Short-Term Fixed Income
  • Fixed income’s role in our portfolios is to reduce volatility. We seek to accomplish this by employing:
    - Shorter maturities that have low correlations historically with stocks - High-quality instruments to lower default risk

The Need for Diversification

Asset Class Index Performance 1995 – 2010
Diversification does not guarantee a profit or protect against a loss


larger [+]  |   See Footnote 1

 

Invest Internationally

Global Market Capitalization
Diversification does not guarantee a profit or protect against a loss


See Footnote 2

 

U.S. and International Markets Perform Differently
Rolling 12-month Variance - Jan. 1972 - Dec. 2009


See Footnote 3

 

Invest in High-Quality, Short-Term Fixed Income

  • Generally, longer maturity bonds entail more risk
  • Investors are typically not properly compensated for that additional risk (see chart below)
  • However, higher-quality, shorter maturities can help dampen portfolio volatility

Risk and Rewards Examined for Bonds
1964 – 2009

See Footnote 4

FOOTNOTE 1 – Data Sources: Center for Research in Security Prices (CRSP), BARRA Inc. and Morgan Stanley Capital International, January 2010. All investments involve risk. Foreign securities involve additional risks, including foreign currency changes, political risks, foreign taxes, and different methods of accounting and financial reporting. Past performance is not indicative of future performance. Treasury bills are guaranteed as to repayment of principal and interest by the U.S. government. This information does not constitute a solicitation for sale of any securities. CRSP is the Center for Research in Security Prices. CRSP ranks all NYSE companies by market capitalization and divides them into 10 equally-populated portfolios. AMEX and NASDAQ National Market stocks are then placed into deciles according to their respective capitalizations, determined by the NYSE breakpoints. CRSP Portfolios 1-5 represent large-cap stocks; Portfolios 6-10 represent small caps; Value is represented by companies with a book-to-market ratio in the top 30% of all companies. Growth is represented by companies with a book-to-market ratio in the bottom 30% of all companies. S&P 500 Index is the Standard & Poor’s 500 Index. The S&P 500 Index measures the performance of large-capitalization U.S. stocks. The S&P 500 is an unmanaged market value-weighted index of 500 stocks that are traded on the NYSE, AMEX and NASDAQ. The weightings make each company’s influence on the index performance directly proportional to that company’s market value. The MSCI EAFE Index (Morgan Stanley Capital International Europe, Australasia, Far East Index) is comprised of over 1,000 companies representing the stock markets of Europe, Australia, New Zealand and the Far East, and is an unmanaged index. EAFE represents non-U.S. large stocks. Foreign securities involve additional risks, including foreign currency changes, political risks, foreign taxes and different methods of accounting and financial reporting. Consumer Price Index (CPI) is a measure of inflation. REITs, represented by the NAREIT Equity REIT Index, is an unmanaged market cap-weighted index comprised of 151 equity REITS. Emerging Markets index represents securities in countries with developing economies and provide potentially high returns. Many Latin American, Eastern European and Asian countries are considered emerging markets. Indexes are unmanaged baskets of securities without the fees and expenses associated with mutual funds and other investments. Investors cannot directly invest in an index.


FOOTNOTE 2 – *Source: Impact of an Aging Population on the Global Economy. Jeremy J. Siegel CFA Institute Conference Proceedings Quarterly (09/07)


FOOTNOTE 3 – Past Performance is not indicative of future results. All investments involve risk. Foreign securities involve additional risks including foreign currency changes, taxes and different accounting and financial reporting methods. International market performance represented by the MSCI EAFE Index (Morgan Stanley Capital International Europe, Australasia, Far East Index), comprised of over 1,000 companies representing the stock markets of Europe, Australia, New Zealand and the Far East, and is an unmanaged index. EAFE represents non-U.S. large stocks. U.S. market performance represented by the Standard & Poor’s 500 Index, an unmanaged market value-weighted index of 500 stocks that are traded on the NYSE, AMEX and NASDAQ. The weightings make each company’s influence on the index performance directly proportional to that company’s market value.


FOOTNOTE 4 – Source: One-Month U.S. Treasury Bills, Five-Year U.S. Treasury Notes, and Twenty-Year (Long-Term) U.S. Government Bonds provided by Ibbotson Associates. Six-Month U.S. Treasury Bills provided by CRSP (1964-1977) and Merrill Lynch (1978-present). One-Year U.S. Treasury Notes provided by the Center for Research in Security Prices (1964-May 1991) and Merrill Lynch (June 1991-present). Morningstar data © 2009 Stocks, Bonds, Bills, and Inflation Yearbook (2009), Morningstar. The Merrill Lynch Indices are used with permission; copyright 2010 Merrill Lynch, Pierce, Fenner & Smith Incorporated; all rights reserved. Assumes reinvestment of dividends. Past performance is not indicative of future results. All investments involve risk. Standard deviation annualized from quarterly data. Standard deviation is a statistical measurement of how far the return of a security (or index) moves above or below its average value. The greater the standard deviation, the riskier an investment is considered to be.

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