® 1 afn32287_1007 afn32287_1009 asset allocation: beyond the basics
TRANSCRIPT
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1AFN32287_1007AFN32287_1009
Asset Allocation: Beyond the Basics
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Today’s Agenda
• Asset allocation concepts and tools• Asset categories, sub-categories, and styles• Asset allocation case studies• Rebalancing
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Why Asset Allocation?
• To diversify your investments• To align your portfolio with your
investment goals• To maximize
return potential for a given level of risk 91.5% of the
variability of portfolio return is due to asset
allocation
1.8% Markettiming
4.6% Securityselection
2.1% Other factors
The Potential Impact of Asset Allocation
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The Three Major Asset Classes
Sources: Standard & Poor’s; the Federal Reserve. Based on rolling 12-month periods for the 30 years ended December 31, 2009. Stocks represented by the S&P 500 index. Bonds represented by the Barclays Aggregate Bonds Index. Cash equivalents represented by the Barclays 3-Month Treasury Bills Index. Past performance cannot guarantee future results. (CS000132)
Risk/Return Potential Range of Returns
Stocks High -43.3% to +61.2%
Bonds Medium -16.1% to +55.4%
Cash Equivalents Low +0.2% to +14.7%
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The Trade-Off Between Risk and Return
Sources: Standard & Poor’s; the Federal Reserve. Stocks represented by the S&P 500 index. Bonds represented by the Barclays Aggregate Bond Index. Cash equivalents represented by the Barclays 3-Month Treasury Bills Index. Past performance cannot guarantee future results. (CS000137)
Risk and Return Over 30 Years Ended December 31, 2009
60% Stocks/30% Bonds/
10% Cash
Cash
Stocks
Bonds
4%
5%
6%
7%
8%
9%
10%
11%
12%
0% 5% 10% 15% 20%
< Lower Risk (Standard Deviation) Higher Risk >
< L
ow
er R
etu
rn
H
igh
er R
etu
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Determining Your Specific Asset Allocation
• Identify your investment goals• Quantify your investment horizon• Determine your risk tolerance
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Strategic vs. Tactical Allocation
Strategic Tactical
Stocks
Bonds
Cash
Growth/value
Large cap/small cap
Domestic/international
Sector specific
Issuer
Maturity
Quality
Yield {{
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Growth vs. Value
Growth• Higher priced than broader market• High earnings growth records• Less sensitive to economic conditions than broader market
Value• Lower priced than broader market• Currently priced below similar companies in industry• Carry more risk than broader market
Blend• Combines growth and value stocks
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Growth vs. Value: Allocation ConsiderationsGrowth and value have taken turns leading and lagging the market
(30 years ended December 31, 2009)
Source: Standard & Poor’s. Based on the total calendar-year returns of a composite of the S&P 500/BARRA Growth and Value indexes and the S&P/Citi Growth and Value indexes. Index performance results do not take into account the fees and expenses of the individual investments that are tracked. Results include reinvested dividends. Past performance is no guarantee of future results. (CS000170)
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Small vs. Large Cap
Small Cap• Young companies or those that serve niche markets
or emerging industries• High growth potential• High volatility and risk
Large Cap• Mature, well-known companies in established industries,
with long track records of performance• More stable than small cap; many pay dividends• Lower growth potential and risk than small cap
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Small- vs. Large-Cap Allocation ConsiderationsSmall and large caps have alternated market leadership
(30 years ended December 31, 2009)
Source: Standard & Poor’s. Based on rolling 12-month returns. Small-capitalization stocks are represented by a composite of CRSP 6th-10th Decile Portfolio and S&P SmallCap 600 Index. Large-capitalization stocks are represented by the total returns of Standard & Poor’s Composite Index of 500 Stocks. Index performance results do not take into account the fees and expenses of the individual investments that are tracked. Results include reinvested dividends. Past performance is no guarantee of future results. (CS000049)
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International Stocks
• Provide diversification and upside potential• Involve higher risk, including currency and political risk• Developed markets: Countries with mature, stable
governments and economies, with long-established financial markets
• Emerging markets: Less developed countries that may be experiencing rapid economic growth
• Global vs. international funds
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International Stocks: Allocation Considerations
Domestic vs. Foreign Stock Performance (30 years ended December 31, 2009)
Sources: Morgan Stanley Capital International MSCI EAFE ® Index; Standard & Poor’s. Based on 36-month rolling periods during the 30 years ended December 31, 2009. U.S. stocks represented by the S&P 500 index, an unmanaged index generally considered representative of the U.S. stock market. Foreign stocks by the MSCI EAFE® (Europe, Australia, and Far East) index, an unmanaged index generally considered representative of developed international markets. Past performance is no guarantee of future results. (CS000173)
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Fixed Income Choices
• High-yield bonds • Corporate bonds• Municipal bonds• U.S. government-sponsored
enterprise bonds• U.S. government bonds
Risk/ReturnPotential
High
Low
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Fixed Income:Allocation Considerations
• Bond allocation risk should generally be lower than equities • Bonds are sensitive to market interest rates• Longer maturities are more vulnerable than short maturities• Low-yielding bonds can be eroded by inflation• Bond holdings should be diversified by type and maturity
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Mixing and Matching
*Standard deviation
Sources: Standard & Poor’s; Barclays Capital; the Federal Reserve. For the 25 years ended December 31, 2009. Growth and value stocks represented by the compound annualized total returns of a composite of the S&P 500/BARRA Growth and Value indexes and the S&P/Citi Growth and Value indexes. Large-cap stocks represented by the S&P 500 index. Small-cap stocks represented by the S&P SmallCap 600 Index. International stocks represented by the MSCI EAFE® Index. U.S. government bonds represented by total returns of the Barclays Long-Term Government Bond Index. Investment-grade corporate bonds represented by total returns of the Barclays Corporate Bond Index. Municipal bonds represented by the Barclays Municipal Bond Index. Cash represented by the Barclays 3-Month Treasury Bills Index. Past performance is not a guarantee of future results.
Annualized Total Return Risk*
Equities Growth
Value
Large Cap
Small Cap
International
10.46%
10.24%
10.54%
10.85%
10.17%
16.61%
15.78%
15.62%
18.90%
17.88%
Bonds U.S. Government
Munis
Corporates
9.59%
7.46%
8.50%
9.77%
5.06%
5.73%
Cash 4.66% 0.65%
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Case Study I: Young Investor Strategic Allocation
Sources: Standard & Poor’s; Barclays Capital. Stocks are represented by the S&P 500 index, bonds by the Barclays Aggregate Bond Index, for the 25 years ended December 31, 2009. Past performance is no guarantee of future results.
Sample goals: retirement and long-term saving
All-Stock Allocation Stock and Bond Allocation
Average annual return (25 years): 10.54%Risk level: 15.62%
Average annual return (25 years): 8.22%Risk level: 11.22%
25% bonds
75% stocks
100% stocks
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Case Study I: Young Investor Tactical Allocation
Sources: Standard & Poor’s; Barclays Capital; the Federal Reserve. For the 25 years ended December 31, 2009. Growth and value stocks represented by the compound annualized total returns of a composite of the S&P 500/BARRA Growth and Value indexes and the S&P/Citi Growth and Value indexes. Large-cap stocks represented by the S&P 500 index. Small-cap stocks represented by the S&P SmallCap 600 Index. International stocks represented by the MSCI EAFE® Index. U.S. government bonds represented by total returns of the Barclays Long-Term Government Bond Index. Municipal bonds represented by the Barclays Municipal Bond Index. Corporate bonds represented by total returns of Barclays Corporate Index. Cash represented by the Barclays 3-Month Treasury Bills Index. Past performance is no guarantee of future results.
Annualized Total Return Risk*
Stocks Growth
Value
Large Cap
Small Cap
International
75% 15%
15%
15%
15%
15%
Bonds U.S. Government
Munis
Corporates
10%
15%
10%
15%
Cash
TotalTotal Return (25 years)Risk (standard deviation)
100%10.41%12.22%
100%10.57%11.90%
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Case Study II: Mid-Life Investor Strategic Allocation
Sample goals: short term—college savings; long term—retirement
50% stocks
Less Conservative Allocation
More Conservative Allocation
Average annual return (25 years): 9.34%Risk level: 9.66%
Average annual return (25 years): 8.93%Risk level: 8.19%
30% bonds
20%cash
25% bonds
15% cash
60% stocks
Sources: Standard & Poor’s; Barclays Capital; the Federal Reserve. Stocks are represented by the S&P 500 index, bonds by the Barclays Aggregate Bond Index, and cash by the Barclays 3-Month Treasury Bills Index, for the 25 years ended December 31, 2009. Past performance is no guarantee of future results.
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Case Study II: Mid-Life Investor Tactical Allocation
Sources: Standard & Poor’s; Barclays Capital; the Federal Reserve. For the 25 years ended December 31, 2009. Growth and value stocks represented by the compound annualized total returns of a composite of the S&P 500/BARRA Growth and Value indexes and the S&P/Citi Growth and Value indexes. Large-cap stocks represented by the S&P 500 index. Small-cap stocks represented by the S&P SmallCap 600 index. International stocks represented by the MSCI EAFE® Index. U.S. government bonds represented by total returns of the Barclays Long-Term Government Bond Index. Municipal bonds represented by Barclays Municipal Bond Index. Corporate bonds represented by total returns of Barclays Corporate Bond Index. Cash represented by the Barclays 3-Month Treasury Bills Index. Past performance is no guarantee of future results.
Option 1 Option 2
Stocks Growth
Value
Large Cap
Small Cap
International
15%
15%
15%
15%
50%
10%
Bonds U.S. Government
Munis
Corporates
15%
10%
25%
Cash 15% 15%
TotalTotal Return (25 years)Risk (standard deviation)
100%9.77%9.99%
100%9.69%9.71%
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Case Study III: Nearing Retirement Strategic Allocation
Sample goals: retirement income; keeping ahead of inflation
40% bonds
20% cash
40% bonds
10% cash
50% stocks
40% stocks
Less Conservative Allocation
More Conservative Allocation
Average annual return (25 years): 9.28%Risk level: 8.35%
Average annual return (25 years): 8.18%Risk level: 6.83%
Sources: Standard & Poor’s; Barclays Capital; Federal Reserve. Stocks are represented by the S&P 500 index, bonds by the Barclays Aggregate Bond Index, and cash by the Barclays 3-Month Treasury Bills Index, for the 25 years ended December 31, 2009. Past performance is no guarantee of future results.
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Case Study III: Nearing Retirement Tactical Allocation
Option 1 Option 2
Stocks Growth
Value
Large Cap
Small Cap
International
10%
10%
10%
10%
20%
20%
Bonds U.S. Government
Munis
Corporates 40%
40%
Cash 20% 20%
TotalTotal Return (25 years)Risk (standard deviation)
100%8.92%7.37%
100%8.36%6.44%
Sources: Standard & Poor’s; Barclays Capital; Federal Reserve. For the 25 years ended December 31, 2009. Growth and value stocks represented by the compound annualized total returns of a composite of the S&P 500/BARRA Growth and Value indexes and the S&P/Citi Growth and Value indexes. Large-cap stocks represented by the S&P 500 index. Small-cap stocks represented by the S&P SmallCap 600 index. International stocks represented by the MSCI EAFE® Index. U.S. government bonds represented by total returns of the Barclays Long-Term Government Bond Index. Municipal bonds represented by Barclays Municipal Bond Index. Corporate bonds represented by total returns of Barclays Corporate Bond index. Cash represented by the Barclays 3-Month Treasury Bills Index. Past performance is no guarantee of future results.
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Lifestyle Funds
• Portfolios of funds based on defined risk profiles• Diversified by asset class, investment type, and
style• A simple asset allocation solution
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Drift and Rebalancing
Sources: Standard & Poor’s; Morgan Stanley Capital International; Barclays Capital; the Federal Reserve. Domestic stocks are represented by the total monthly return of the S&P 500 index; foreign stocks by the MSCI EAFE® Index; bonds by Barclays Aggregate Bond Index; and cash by the Barclays 3-Month Treasury Bills Index. Past performance is no guarantee of future results. (CS000128)
Drift Can Expose a Portfolio to Greater Risk
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Rebalancing Considerations
• Rebalance at least annually• For retirement plans, rebalance by adjusting make-up of
contributions• Minimize transaction costs and tax consequences by
adjusting new money, not liquidating existing assets• Rebalance in tax-deferred accounts when possible• Consider using lump-sum payments
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Putting It Together
• Asset allocation process:• Assess your goals and risk profile• Determine a strategic allocation• Choose specific investments to conform to this
allocation
• Diversify• Consider lifestyle portfolios • Rebalance periodically
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Put Your Strategy to Work!
Investment options are offered through a group variable annuity contract (Forms 902-GAQC-09 or 902-GAQC-09(OR) or 901-GAQC-07 or 901-GAQC-07(OR)) underwritten by United of Omaha Life Insurance Company for contracts issued in all states except New York. United of Omaha Life Insurance Company is not licensed in New York. In New York, Companion Life Insurance Company, Hauppauge, NY underwrites the group variable annuity (Form 900-GAQC-07(NY)). Each company accepts full responsibility for each of their respective contractual obligations under the contract but does not guarantee any contributions or investment returns except as to the Guaranteed Account and the Lifetime Guaranteed Income Account as provided under the contract. Neither United of Omaha, Companion Life Insurance, nor their representatives or affiliates offers investment advice in connection with the contract.
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