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© 2008 Morningstar, Inc. All rights reserved. 3/1/2008LCN200803-2013997
Risk and Volatility
Types of Risk
© 2008 Morningstar, Inc. All rights reserved. 3/1/2008
Market timing Inflation
Risk
Credit
Industry/company
Market
Interest rateCall/reinvestment
Liquidity
Political/economic
Currency
Stock Diversification
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. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008
1 2 4 6 8 16 30 50 100 1000
Risk
• Company risk
• Market risk
Number of stocks in portfolio
Risk Tolerance Spectrum
© 2008 Morningstar, Inc. All rights reserved. 3/1/2008
High risk
Low risk
Small stocks
International stocks
Large stocks
Corporate bonds
Government bonds
Cash equivalents
High return
Low return
Asset Class ReturnsHighs and lows: 1926–2007
Past performance is no guarantee of future results. Each bar shows the range of annual total returns for each asset class over the period 1926–2007. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008
Compoundannual return:12.5% 10.4%
5.5% 5.3% 3.7%
Smallstocks
Largestocks
Long-termgovernment bonds
Intermediate-termgovernment bonds
Treasury bills
150%
100
50
0
–50
–100
142.9%
–58.0%
–43.3%
–9.2% –5.1%0.0%
14.7%
29.1%
40.4%
54.0%
Reduction of Risk Over Time1926–2007
Past performance is no guarantee of future results. Each bar shows the range of compound annual returns for each asset class over the period 1926–2007. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008
Small stocks Large stocks Government bonds Treasury bills
–60
–30
0
30
60
90
120
150%
1-year
Holding period
5-year 20-year 1-year 5-year 20-year 1-year 5-year 20-year 1-year 5-year 20-year
Compound annual return:12.5% 10.4%
5.5% 3.7%
Risk Versus ReturnStocks, bonds, and bills 1926–2007
Past performance is no guarantee of future results. Risk and return are measured by standard deviation and compound annual return, respectively. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008
14% Return
12
10
8
6
4
2
0
0% Risk 5 10 15 20 25 30 35
Small stocks
Large stocks
Treasury bills
Long-term government bonds
Intermediate-term government bonds
Ibbotson® SBBI® Summary statistics 1926–2007
Past performance is no guarantee of future results. *The 1933 small company stock total return was 142.9%. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008
Compoundannualreturn
Arithmeticannualreturn
Risk(standarddeviation)
Large stocks
Small stocks*
Governmentbonds
Treasurybills
Inflation
10.4%
12.5%
5.5%
3.7%
3.0%
12.3%
17.1%
5.8%
3.8%
3.1%
20.0%
32.6%
9.2%
3.1%
4.2%
–90 0 90
Stock and Bond Volatility Varies1926–2007
Past performance is no guarantee of future results. Monthly returns in percent from 1926–2007. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008
1926 1946 1966 1986 1926 1946 1966 1986
50%
40
30
20
10
0
–10
–30
–20
Stocks Bonds
Risk Changes Over TimeFive-year rolling periods 1926–2007
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. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008
0
80
70
60
50
40
30
20
10
90% Standard deviation
Dec 1930
Jan 1926
1940
1936
1950
1946
1960
1956
1970
1966
1980
1976
1990
1986
2000
1996
• Small stocks
• Large stocks
• Long-term government bonds
• Treasury bills
Inflation Risk: Stocks Versus Fixed IncomeRange of average inflation-adjusted returns over 20-year periods 1926–2007
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. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008
17.2%
4.0%
13.3%
0.8%
8.6%
–3.1% –3.0%
2.9%
Treasurybills
Governmentbonds
Largestocks
Smallstocks
20% Return
15
10
5
–5
0
Fixed Income Maturity Risk1970–2007
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. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008
15%
10
5
0
–5
–10 Long-termgovernment bond
Intermediate-termgovernment bond
Short-termgovernment bond
1.6%
5.9%
9.2%
–7.7%
–3.8%
–1.3%
• Average rise in price during declining interest rate periods
• Average decline in price during rising interest rate periods
Liquidity RiskAverage daily stock trading volume as of December 2007
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. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008
0.33
0
1
2
4
$5 mil
Large-cap stocks Mid-cap stocks Small-cap stocks
3
4.10
1.70
Market-Timing RiskThe effects of missing the best month of annual returns
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. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008
–40
–30
–20
–10
0
10
20
30
40% Return
1988 1994 2000 2006198219761970
• Annual return• Annual return minus best month