© 2009 Morningstar, Inc. All rights reserved. 3/1/2009 Portfolio Diversification

What is Asset Allocation? © 2009 Morningstar, Inc. All rights reserved. 3/1/2009 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

Reduction of Portfolio Risk Past performance is no guarantee of future results. Risk is measured by standard deviation. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2009 Morningstar, Inc. All rights reserved. 3/1/ % Risk Number of randomly selected assets in portfolio 13.0% 10.8% 9.8% 9.2% 8.9% 8.7% 8.5% 8.3%

Potential to Reduce Risk or Increase Return 1970–2008 Past performance is no guarantee of future results. Risk and return are measured by standard deviation and compound annual return, respectively. They are based on annual data over the period 1970–2008. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2009 Morningstar, Inc. All rights reserved. 3/1/2009 Lower risk portfolioHigher return portfolioFixed income portfolio Return:8.4% Risk:6.3% Return:9.0% Risk:7.5% Return:8.4% Risk:7.5% 15% 85% 17% 21% 27% 12% 56% 67% Stocks Bonds Cash

The Case for Diversifying Past performance is no guarantee of future results. Time period illustrated is from 1956–1962. This time period was chosen as a dramatic illustration of stock and bond return behavior and how their often opposite movements reduced portfolio volatility. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2009 Morningstar, Inc. All rights reserved. 3/1/ % Return –10 –20 Year Compound annual return 1.9 Stocks 50/50 portfolio Bonds 8.5% 5.8

Stocks and Bonds: Risk Versus Return 1970–2008 Past performance is no guarantee of future results. Risk and return are measured by standard deviation and arithmetic mean, respectively. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2009 Morningstar, Inc. All rights reserved. 3/1/ % Return Maximum risk portfolio: 100% Stocks 60% Stocks, 40% Bonds 50% Stocks, 50% Bonds 100% Bonds Minimum risk portfolio: 25% Stocks, 75% Bonds % Risk 80% Stocks, 20% Bonds

More Funds Do Not Always Mean Greater Diversification Identifying potential security overlap 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. © 2009 Morningstar, Inc. All rights reserved. 3/1/2009 Equity portfolio B Deep-valueCore-valueCoreCore-growthHigh-growth Micro Small Mid Large Giant Equity portfolio A Deep-valueCore-valueCoreCore-growthHigh-growth Micro Small Mid Large Giant

– % –3.63.7– –9.1–11.9– –7.85.6–0.92.1–7.3–9.0–14.0–21.2– Asset-Class Winners and Losers 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. © 2009 Morningstar, Inc. All rights reserved. 3/1/2009 Highest return Lowest return Small stocks Large stocks International stocks Long-term government bonds Treasury bills –36.7 –37.0 –43.1

Correlation Can Help Evaluate Potential Diversification Benefits Asset-class correlation 1926–2008 Past 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 indicating no 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 be made directly in an index. © 2009 Morningstar, Inc. All rights reserved. 3/1/2009 Small stocks Large stocks LT corporate bonds LT govt bonds IT govt bonds Treasury bills Small stocks Large stocks LT corporate bonds LT govt bonds IT govt bonds Treasury bills –0.07 –0.10 –

Diversification in Bull and Bear Markets 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. © 2009 Morningstar, Inc. All rights reserved. 3/1/2009 $2,500 Bull market 2,000 1,500 1, ,000 1,250 $1,500 Bear market $1,314 $901 $599 $1,274 Stocks 50/50 portfolio Bonds Oct Nov $2,084 $1,653

Diversified Portfolios and Bear Markets Past performance is no guarantee of future results. Diversified portfolio: 35% stocks, 40% bonds, 25% Treasury bills. Hypothetical value of $1,000 invested at the beginning of 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. © 2009 Morningstar, Inc. All rights reserved. 3/1/2009 Mid-1970s recession (Jan 1973–Jun 1976)2007 bear market (Nov 2007–Dec 2008) $1,150 $1,014 $950 $599 $1,250 1, Jan 1973 Jan 1974 Jan 1975 Jan 1976 Nov 2007 Mar 2008 Jul 2008 Nov 2008 Stocks Diversified portfolio