Principles of Asset Allocation

Importance of Asset Allocation Source: Brinson, Beebower and Singer

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

Asset Class Relationship Volatility Specialty Stocks Small Cap Stock Mid Cap Stock Foreign Stock Large Cap Stock Specialty Bonds Corporate Bonds Government Bonds Foreign Bonds Real Estate Commodities

Cumulative Long-term Returns 75 Years Source: Ibbotson Associates

Short-Term (1-Year) Returns Source: Ibbotson Associates

Three Components in Determining Allocation of Assets Component #2 Asset Class Volatility [Standard Deviation]

Distribution of Returns by Asset Class Source: Ibbotson Associates

Reduction of Risk Over Time One Year Holding Period Five Year Holding Period Ten Year Holding Period Twenty Year Holding Period Source: Ibbotson Associates

Three Components in Determining Allocation of Assets Component #3 Relative Volatility of the Asset Classes [Correlation]

Correlations Positive CorrelationNegative Correlation

Correlations of Asset Classes Source: Ibbotson Associates

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

Diversifying Risk 100% Stocks 80% Stocks/ 20% Bonds 60% Stocks/ 40% Bonds 40% Stocks/ 60% Bonds 50% Stocks/ 50% Bonds 20% Stocks/ 80% Bonds 100% Bonds

Diversifying Risk Stocks and Bonds Adds Real Estate and Commodities

Importance of Asset Allocation Source: Brinson, Beebower and Singer