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Asset Allocation: Beyond the Basics

Learn the concepts, tools, and case studies of asset allocation. Diversify your investments and align your portfolio with your investment goals.

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Asset Allocation: Beyond the Basics

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  1. Asset Allocation: Beyond the Basics 1 AFN32287_1009 AFN32287_1007

  2. Today’s Agenda • Asset allocation concepts and tools • Asset categories, sub-categories, and styles • Asset allocation case studies • Rebalancing

  3. 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 The Potential Impact of Asset Allocation 4.6% Securityselection 1.8% Markettiming 91.5% of the variability of portfolio return is due to asset allocation 2.1% Other factors

  4. 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) The Three Major Asset Classes

  5. 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) The Trade-Off Between Risk and Return Risk and Return Over 30 Years Ended December 31, 2009

  6. Determining Your Specific Asset Allocation • Identify your investment goals • Quantify your investment horizon • Determine your risk tolerance

  7. Strategic vs. Tactical Allocation Strategic Tactical Growth/value Large cap/small cap Domestic/international Sector specific Issuer Maturity Quality Yield Stocks Bonds Cash { {

  8. 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

  9. 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) Growth vs. Value: Allocation Considerations Growth and value have taken turns leading and lagging the market(30 years ended December 31, 2009)

  10. 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

  11. 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) Small- vs. Large-Cap Allocation Considerations Small and large caps have alternated market leadership(30 years ended December 31, 2009)

  12. 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

  13. 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) International Stocks: Allocation Considerations Domestic vs. Foreign Stock Performance (30 years ended December 31, 2009)

  14. Fixed Income Choices • High-yield bonds • Corporate bonds • Municipal bonds • U.S. government-sponsored enterprise bonds • U.S. government bonds High Risk/ReturnPotential Low

  15. 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

  16. 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. Mixing and Matching *Standard deviation

  17. 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. Case Study I: Young Investor Strategic Allocation Sample goals: retirement and long-term saving All-Stock Allocation Stock and Bond Allocation 25% bonds 100% stocks 75% stocks Average annual return (25 years): 10.54% Risk level: 15.62% Average annual return (25 years): 8.22% Risk level: 11.22%

  18. 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. Case Study I: Young Investor Tactical Allocation

  19. 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. Less Conservative Allocation More Conservative Allocation 15% cash 20% cash 50% stocks 25% bonds 60% stocks 30% bonds Average annual return (25 years): 9.34% Risk level: 9.66% Average annual return (25 years): 8.93% Risk level: 8.19% Case Study II: Mid-Life Investor Strategic Allocation Sample goals: short term—college savings; long term—retirement

  20. 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. Case Study II: Mid-Life Investor Tactical Allocation

  21. Less Conservative Allocation More Conservative Allocation 10% cash 20% cash 40% stocks 50% stocks 40% bonds 40% bonds Average annual return (25 years): 9.28% Risk level: 8.35% Average annual return (25 years): 8.18% Risk level: 6.83% Case Study III: Nearing Retirement Strategic Allocation Sample goals: retirement income; keeping ahead of inflation 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.

  22. Case Study III: Nearing Retirement Tactical Allocation 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.

  23. Lifestyle Funds • Portfolios of funds based on defined risk profiles • Diversified by asset class, investment type, and style • A simple asset allocation solution

  24. 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 Drift and Rebalancing

  25. 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

  26. 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

  27. 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. All content supplied by Standard & Poor’s

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