© 2014 morningstar. all rights reserved. the images contained in the presentations and education...

© 2014 Morningstar. All Rights Reserved. The images contained in the Presentations and Education modules are provided as a single user license (‘Authorized User’). Images may be used in seminars and client presentations by the Authorized User, but may not be distributed electronically or without written permission from Morningstar. Printed handouts of the images may be used with individual clients and prospects, but may not be mass distributed. For additional user licenses or distribution capabilities, please contact your Morningstar sales representative.

Portfolio Diversification and Performance

The Case for Diversifying2004–2013

Past performance is no guarantee of future results. *The return of the portfolio is higher than the returns of the constituent asset classes due to a phenomenon called “the rebalancing bonus,” which occurred due to the unusual behavior of stocks and bonds over the time period analyzed. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2014 Morningstar. All Rights Reserved.

30% Return

20

10

–10

–20

0

–30

–40

Year 1 2 3 4 5 6

Compound annual return

6.1

• Stocks

• 50/50 portfolio

• Bonds

7.4%

7.9*

7 8 9 10

Stocks and Bonds: Risk Versus Return1970–2013

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. © 2014 Morningstar. All Rights Reserved.

12% Return

11

10

9

11 12 13 14 15 16 1917 189% Risk 10

Maximum risk portfolio:100% Stocks

80% Stocks, 20% Bonds

60% Stocks, 40% Bonds

50% Stocks,

50% Bonds

Minimum risk portfolio:32% Stocks, 68% Bonds

100% Bonds

Diversified Portfolios in Various Market ConditionsPerformance during and after select 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 November 2007, respectively. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2014 Morningstar. All Rights Reserved.

Mid-1970s recession (Jan 1973–Jun 1976) 2007 bear market and aftermath (Nov 2007–Dec 2013)

$1,750

1,500

1,000

250 Jan1973

Jan1974

Jan1975

Jan1976

Nov 2007

Nov 2008

Nov2009

Nov 2013

750

Nov 2010

Nov 2011

$1,368$1,355

$1,446• Stocks• 50/50 portfolio• Bonds

1,250

500

$1,014

$1,150$1,171

Nov 2012

Potential to Reduce Risk or Increase Return1970–2013

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 1970–2013. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2014 Morningstar. All Rights Reserved.

Lower risk portfolio Higher return portfolioFixed income portfolio

Return: 7.7%Risk: 5.5%



15%

85%39%

31%

20%9%

41%

60%

• Stocks• Bonds• Cash

Correlation Can Help Evaluate Potential Diversification BenefitsAsset-class correlation 1926–2013

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. © 2014 Morningstar. All Rights Reserved.

Smallstocks

Largestocks

LT corporatebonds

LT govtbonds

IT govtbonds

Treasurybills

Small stocks

Large stocks

LT corporate bonds

LT govt bonds

IT govt bonds

Treasury bills

1.00

0.80

0.05

–0.10

–0.12

–0.10

1.00

0.14

–0.01

–0.03

–0.02

1.00

0.89

0.87

0.17

1.00

0.89

0.20

1.00

0.46 1.00

A Diversified Portfolio: Sum of the PartsRisk and return characteristics

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. Diversification does not eliminate the risk of experiencing investment losses. © 2014 Morningstar. All Rights Reserved.

Large stocks

Return:Risk:

Small stocks

Return:Risk:

Bonds

Return:Risk:

Cash

Return:Risk:

International stocks

Return:Risk:

9.4%22.3%

8.4%12.1%

5.2%3.3%

10.4%17.6%

12.9%23.2%

Total portfolio


Large stocks

Return:Risk:

Small stocks

Return:Risk:

Bonds

Return:Risk:

Cash

Return:Risk:


Return:Risk:

6.9%22.2%

6.1%13.7%

1.5%1.9%

7.4%18.8%

9.3%23.0%

Large stocks

Return:Risk:

Small stocks

Return:Risk:

Bonds

Return:Risk:

Cash

Return:Risk:


Return:Risk:

12.4%16.8%

1.9%17.4%

0.1%0.0%

17.9%11.7%

22.8%18.0%

Total portfolio


Total portfolio


1970–2013Past 10 years2004–2013

Past 5 years2009–2013

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. © 2014 Morningstar. All Rights Reserved.

Highestreturn

Lowestreturn

• Small stocks • Large stocks • International stocks • Long-term government bonds • Treasury bills • Diversified portfolio

28.2

3.1

2.1

0.0

–3.3

–11.7

11.628.6 29.8 21.5 22.8 17.8 60.7 20.7 14.0 26.9 25.9

9.920.3 27.3 5.9 3.8 1.6 39.2 18.4 7.8 16.2 1.6

5.513.1 21.0 0.1 3.7 –6.3 28.7 11.9 7.1 15.8 –17.9

5.311.9 14.8 –3.6 –0.6 –13.3 26.2 10.9 5.7 13.0 –36.7

4.74.9 4.7 –9.1 –11.9 –15.7 1.4 8.5 4.9 4.8 –37.0

–5.2–7.3 –9.0 –14.0 –21.2 –22.1 1.0 1.2 3.0 1.2 –43.1

32.5

28.1

26.5

14.4

0.1

–14.9

31.3

15.1

13.0

10.1

8.2

0.1

18.2

17.9

16.0

11.1

3.3

0.1

45.1

32.4

23.3

17.9

0.0

–11.4

33.4

22.8

15.9

15.9

5.3

2.1

23.0

17.6

10.2

6.4

5.2

–0.9

37.6

34.5

31.7

24.2

11.6

5.6

8.1%

3.9

3.1

1.7

1.3

–7.8

20081998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2009 2010 2011 2012 20131997199619951994

Hypothetical Portfolio Performance1926–2013

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. The information, data, analyses, and opinions contained herein do not constitute investment advice offered by Morningstar and are provided solely for informational purposes. © 2014 Morningstar. All Rights Reserved.

50

100%

Range of 12-month rolling returns

Avg PositiveReturn

Standard Deviation

100%Bonds

4.39

5.29

–50

150%

0

100

50

Avg NegativeReturn

80% B20% S

5.36

6.54

70% B30% S

6.67

7.11

100%Stocks

18.99

10.08

10% B90% S

17.13

9.77

20% B80% S

15.28

9.42

30% B70% S

13.46

9.04

40% B60% S

11.66

8.61

50% B50% S

9.90

8.15

60% B40% S

8.22

7.65

90% B10% S

4.51

5.93

–5.6%

47.9%62.5%

77.8%

110.3%127.3%

162.9%

–67.6%–63.1%–58.3%–52.9%–47.1%–26.1%

–10.2% –17.8%

32.7% 30.8% 34.0%

93.8%

144.9%

–33.7% –40.7%

Percentage of positive/negative 12-month rolling periods

8.8% 7.8% 9.9% 13.4% 16.5% 18.9% 20.4% 22.5% 24.0% 24.9% 25.8%

• Positive• Negative

CompoundAnnual Return

Long-Term Portfolio Performance1926–2013

Past performance is no guarantee of future results. Hypothetical value of $1 invested at the beginning of 1926. Assumes reinvestment of income and no transaction costs or taxes. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2014 Morningstar. All Rights Reserved.

10.1%9.28.16.85.3


$10,000

1,000

100

10

1

0.10

1926 1936 1946 1956 1966 1976 1986 1996 2006

$4,677

$2,379

$987

$335

$93

• Portfolio 1 (100% Stocks)• Portfolio 2 (75% Stocks, 25% Bonds)• Portfolio 3 (50% Stocks, 50% Bonds)• Portfolio 4 (25% Stocks, 75% Bonds)• Portfolio 5 (100% Bonds)

$5.15

$5.84

$4.38

$3.60

$2.86

$10

5

0.80

1994 1999 2004 2009

20-Year Portfolio Performance1994–2013

Past performance is no guarantee of future results. Hypothetical value of $1 invested at the beginning of 1994. Assumes reinvestment of income and no transaction costs or taxes. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2014 Morningstar. All Rights Reserved.

9.2%8.57.76.65.4


• Portfolio 1 (100% Stocks)• Portfolio 2 (75% Stocks, 25% Bonds)• Portfolio 3 (50% Stocks, 50% Bonds)• Portfolio 4 (25% Stocks, 75% Bonds)• Portfolio 5 (100% Bonds)

1

Portfolio Summary StatisticsRolling periods 1926–2013


162.9%

118.7%

77.8%

40.9%

32.7%

–67.6%

–55.7%

–40.7%

–22.0%

–5.6%

25.8%

23.3%

18.9%

11.3%

8.8%

36.1%

29.0%

22.2%

20.0%

19.5%

–17.4%

–11.5%

–6.1%

–1.2%

0.7%

13.0%

7.6%

4.8%

0.3%

0.0%

21.4%

17.7%

16.2%

14.9%

13.7%

–4.9%

–1.3%

1.5%

3.3%

1.2%

5.7%

1.0%

0.0%

0.0%

0.0%

10.1%

9.2%

8.1%

6.8%

5.3%

Highestreturn

Averagereturn

Lowestreturn

Negativeperiods

Highestreturn

Lowestreturn

Negativeperiods

Highestreturn

Lowestreturn

Negativeperiods

12-month holding period 60-month 120-month

50% 50%

• Stocks• Bonds

100%

25% 75%

75% 25%

100%

16.0

12.5

5.6

2.1

9.0

10.1

8.9

6.6

5.5

32.421.0 12.6 7.6 12.9 28.7 10.9 4.9

24.015.3 7.2 2.7 4.2 22.1 8.7 4.0

15.79.6 1.7 –2.1 –4.6 15.5 6.6 3.1

7.33.9 –3.7 –7.0 –13.3 9.0 4.4 2.2

–1.1–1.8 –9.1 –11.9 –22.1 2.4 2.3 1.4

15.8

12.6

9.5

6.3

3.1

7.8

13.1

0.6

–24.5

–37.0

–11.9

26.5

19.2

4.8

–2.4

12.0

15.1

13.1

9.1

7.1

11.1

9.5

7.6

3.9

2.1

5.8

Diversification May Lessen the Impact of Market Swings


Highest return

Lowest return

(100% Stocks) (75% Stocks, 25% Bonds) (25% Stocks, 75% Bonds) (100% Bonds)(50% Stocks, 50% Bonds)• Portfolio 1 • Portfolio 2 • Portfolio 4 • Portfolio 5 • Portfolio 3

20131999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Portfolio Risk Appears to Diminish Over Time1926–2013

Past performance is no guarantee of future results. Each bar shows the range of rolling returns for each asset class over the period 1926–2013. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2014 Morningstar. All Rights Reserved.

–100

–50

0

50

100

150

200%

75% Stocks/25% Bonds 50% Stocks/50% Bonds 25% Stocks/75% Bonds 100% Bonds100% Stocks

• 12-month holding periods• 60-month holding periods• 120-month holding periods

Compound annualreturn

6.8% 5.3%10.1% 9.2% 8.1%

$350k

50

Enhancing Diversification Using Real AssetsAnnual returns

Past performance is no guarantee of future results. Hypothetical value of $100,000 invested at the beginning of 2000. Assumes reinvestment of income and no transaction costs or taxes. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. Highlighted areas represent years when Portfolio 1 experienced losses. © 2014 Morningstar. All Rights Reserved.

250

200

150

100

• Large stocks

• Small stocks

• International stocks

• REITs

• Commodities

• TIPS

• Bonds

Traditional moderate portfolioPortfolio 1

Traditional moderate portfolio, real assets addedPortfolio 2 Diversification does not eliminate the risk of

experiencing investment losses. The two portfolios are for illustrative purposes only and do not represent investment advice; consult a financial professional for investment advice specific to your situation. Please note that, even though the real-assets-added portfolio outperformed the traditional portfolio over the time period analyzed, this may not always be the case.

Disclosure

300

Port. 1–$23,901

–13%

Port. 2–$3,697

–2%

Portfolio 1–$605

–1%–$3,153

–3%

Portfolio 2–$743

–1%$11,606

10%

2000 2001 2002 20092003 2004 2005 2006 2007 2008 20112010 2012 2013

© 2014 morningstar. all rights reserved. the images contained in the presentations and education...

Documents

guarantee of future

bondsminimum risk portfolio

illustrative purposes

stocks bonds cashcorrelation

return19702013past performance

lower risk portfoliohigher

unusual behavior of

portfolio bonds7