® 1 afn32287_1007 afn32287_1009 asset allocation: beyond the basics

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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 >

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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%


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%


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



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%


Munis

Corporates

15%

10%

25%

Cash 15% 15%


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



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%


Munis

Corporates 40%

40%

Cash 20% 20%


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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® 1 afn32287_1007 afn32287_1009 asset allocation: beyond the basics

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