NAIFA – Palm Beaches



NAIFA – Palm Beaches

“The Importance of Asset Allocation”

Benjamin G. Boynton, CFP®

Goal: This presentation will provide insurance agents an overview and education of why asset allocation and portfolio diversification is very important and how to implement it into their financial planning when working with their clients retirement goals.

Slides 1 – 6 15 minutes

1. The Importance of Asset Allocation

How a Variable Annuity Works

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1. In the accumulation phase, you (the annuity owner) send your premium payment(s) (all at once or over time) to the annuity issuer. If these payments are made with after-tax funds, you may invest an unlimited amount.

2. You may choose how to allocate your premium payment(s) among the various investments offered by the issuer. These investment choices, often called subaccounts, typically invest directly in mutual funds. Generally, you can also transfer funds among investments without paying tax on investment income and gains.

3. The issuer may collect fees to manage your annuity account. These may include an annual administration fee, underlying fund fees and expenses which include an investment advisory fee, and a mortality and expense risk charge. If you withdraw money in the early years of your annuity, you may also have to pay the issuer a surrender fee.

4. The earnings in your subaccounts grow tax deferred; you won't be taxed on any earnings until you begin withdrawing funds or begin taking annuitization payments.

5. With the exception of a fixed account option where a guaranteed* minimum rate of interest applies, the issuer of a variable annuity generally doesn't guarantee any return on the subaccounts you choose. While you might experience substantial growth in your investments, your choices could also perform poorly, and you could lose money.

6. Your annuity contract may contain provisions for a guaranteed* death benefit or other payout upon the death of the annuitant. (As the annuity owner, you're most often also the annuitant, although you don't have to be.)

7. Just as you may choose how to allocate your premiums among the subaccount options available, you may also select the subaccounts from which you'll take the funds if you decide to withdraw money from your annuity.

8. If you make a withdrawal from your annuity before you reach age 59½, you'll not only have to pay tax (at your ordinary income tax rate) on the earnings portion of the withdrawal, but you may also have to pay a 10 percent premature distribution tax.

9. After age 59½, you may make withdrawals from your annuity proceeds without incurring any premature distribution tax. Since nonqualified annuities have no minimum distribution requirements, you don't have to make any withdrawals. However, your annuity contract may specify an age at which you must begin taking income payments.

10. To obtain a guaranteed income stream* for life or for a certain number of years, you can annuitize which means exchanging the annuity's cash value for a series of periodic income payments. The amount of these payments will depend on a number of factors including the cash value of your account at the time of annuitization, the age(s) and gender(s) of the annuitant(s), and the payout option chosen. Usually, you can't change the payments once you've begun receiving them.

11. You'll have to pay taxes (at your ordinary income tax rate) on the earnings portion of any withdrawals or annuitization payments you receive.

*All guarantees are subject to the claims-paying ability of the issuing company.

Note: Variable annuities are sold by prospectus. You should consider the investment objectives, risk, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the variable annuity, can be obtained from the insurance company issuing the variable annuity or from your financial professional. You should read the prospectus carefully before you invest.

2. Asset allocating subaccounts of an Annuity

What Are Annuity Subaccounts?

One of the most popular types of annuities is the variable annuity. A variable annuity contract is often described as a mutual fund family wrapped in an annuity contract. This is because variable annuities offer a selection of investment options that are similar to mutual funds. The typical issuer will offer, at a minimum, a stock, a bond, and a money market fund within its variable annuity product. Many annuities offer a wide range of investment options, with up to 50 different funds.

These annuity investment options are known as subaccounts. Some companies refer to these options as investment portfolios.

How subaccounts work

The purchaser of a variable annuity designates the subaccounts that his or her money will be invested in. The money can be allocated in any way the purchaser chooses. So, assuming that the issuer offers three stock funds, a bond fund, and a money market fund, the purchaser could elect to have each subaccount receive 20 percent of the total contribution. The purchaser could also put all of the contribution into any one subaccount.

Like a mutual fund, there are investment fees associated with these subaccounts. Each subaccount charges a management fee. These fees are often lower than fees charged by mutual funds for similar investments. Keep in mind, however, that variable annuities charge additional fees to protect the insurance company against the risk that you'll live longer than anticipated, or that the company's expenses will be greater than expected. Consequently, total fees are usually higher for a variable annuity than for a mutual fund. Companies may also impose a modest transfer fee for shifting funds between subaccounts.

Unlike mutual funds, funds invested in a variable annuity subaccount grow on a tax-deferred basis. No tax is paid until distributions are taken from the annuity. Note, though, that distributions taken before age 59½ are subject to a 10 percent early withdrawal penalty tax on earnings.

Note:Variable annuities are long-term investments suitable for retirement funding and are subject to market fluctuations and investment risk, including the possibility of loss of principal. Variable annuities are sold by prospectus, which contains information about the variable annuity, including a description of applicable fees and charges. These include, but are not limited to, mortality and expense risk charges, administrative fees, and charges for optional benefits and riders. The prospectus can be obtained from the insurance company offering the variable annuity or from your financial professional. Read it carefully before you invest.

This information, developed by an independent third party, has been obtained from sources considered to be reliable, but Raymond James Financial Services, Inc. does not guarantee that the foregoing material is accurate or complete. This information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. This information is not intended as a solicitation or an offer to buy or sell any security referred to herein. Investments mentioned may not be suitable for all investors. The material is general in nature. Past performance may not be indicative of future results. Raymond James Financial Services, Inc. does not provide advice on tax, legal or mortgage issues. These matters should be discussed with the appropriate professional.

Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC, an independent broker/dealer, and are not insured by FDIC, NCUA or any other government agency, are not deposits or obligations of the financial institution, are not guaranteed by the financial institution, and are subject to risks, including the possible loss of principal.

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2012.

3. What is Asset Allocation?

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An asset is anything that produces income or can be purchased and sold, such as stocks, bonds, or certificates of deposit (CDs). Asset classes are groupings of assets with similar characteristics and properties. Examples of asset classes are large-company stocks, long-term government bonds, and Treasury bills.

Every asset class has distinct characteristics and may perform differently in response to market changes. Therefore, careful consideration must be given to determining which assets you should hold and the amount you should allocate to each asset.

Factors that greatly influence the asset-allocation decision are your financial needs and goals, the length of your investment horizon, and your attitude toward risk.

4. Stock Diversification [pic]

Stock Diversification

Diversification is a major benefit of investing in mutual funds.

Company or individual security risk is the risk that a specific stock may fall in price due to non-market-related factors such as poor company management. It is the risk in excess of the overall stock market and is not always rewarded with higher returns. You assume greater company risk when you invest in a limited number of securities.

Including more securities in a portfolio can reduce the level of company-specific risk you are exposed to. This is true for stocks as well as other types of asset classes. This image illustrates that an investor holding more than 100 stocks assumes very little company risk.

Generally, it is impractical for most investors to buy hundreds of individual stocks. Mutual funds are able to reduce company risk because they have economies of scale. With millions of dollars in assets, mutual funds can afford to take positions in hundreds of stocks.

Even mutual funds, however, cannot diversify away market risk. Market risk is the risk that the entire market will experience a decline in price. Even if you hold every stock in the market and have very little company-specific risk, you will still be exposed to market risk.

Diversification does not eliminate the risk of experiencing investment losses. The portfolios used in this study are equally weighted. Returns and principal invested in stocks are not guaranteed. Mutual funds may have management fees and other additional costs. An investment cannot be made directly in an index.

Source: Lawrence Fisher and James H. Lorie, “Some Studies of Variability of Returns on Investments in Common Stocks,” Journal of Business, April 1970; Edwin J. Elton and Martin J. Gruber, “Risk Reduction and Portfolio Size: An Analytical Solution,” Journal of Business, October 1977; and Meir Statman, “How Many Stocks Make a Diversified Portfolio?,” Journal of Financial and Quantitative Analysis, September 1987.

5. Potential to Reduce Risk or Increase Return

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Potential to Reduce Risk or Increase Return 1970–2010

Historically, adding stocks to a portfolio of less volatile assets reduced risk without sacrificing return or increased return without assuming additional risk.

This image illustrates the risk-and-return profiles of three hypothetical investment portfolios. The lower risk portfolio, which included stocks, had the same return as the portfolio comprised entirely of fixed-income investments, but assumed less risk. The higher return portfolio had the same risk level as the fixed income portfolio, but produced an increased return.

Although it may appear counterintuitive, diversifying a portfolio of fixed-income investments to include stocks reduced the overall volatility of a portfolio during the period 1970–2010. Likewise, it is possible to increase your overall portfolio return without having to take on additional risk.

Because stocks, bonds, and cash generally do not react identically to the same economic or market stimuli, combining these assets can often produce a more appealing risk-and-return tradeoff.

Diversification does not eliminate the risk of experiencing investment losses. Government bonds and Treasury bills are guaranteed by the full faith and credit of the United States government as to the timely payment of principal and interest, while stocks are not guaranteed and have been more volatile than the other asset classes.

About the data

Stocks in this example are represented by the Standard & Poor’s 500®, which is an unmanaged group of securities and considered to be representative of the stock market in general. Long-term government bonds are represented by the 20-year U.S. government bond, intermediate-term government bonds by the five-year U.S. government bond, and cash by the 30-day U.S. Treasury bill. Bonds represent an equally weighted portfolio of long-term government bonds and intermediate-term government bonds. All portfolios are rebalanced annually. Risk is measured by standard deviation. Standard deviation measures the fluctuation of returns around the arithmetic average return of the investment. The higher the standard deviation, the greater the variability (and thus risk) of the investment returns. An investment cannot be made directly in an index. The data assumes reinvestment of all income and does not account for taxes or transaction costs.

6. The Case for Diversifying

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The Case for Diversifying

Diversifying your portfolio makes you less dependent on the performance of any single asset class.

Effective diversification requires combining assets that behave differently when held during changing economic or market conditions. Moreover, investing in assets that have dissimilar return behavior may insulate your portfolio from major downswings.

This image illustrates the annual returns of three different portfolios over a 10-year time period. Stocks represent a 100% investment in large-company stocks. Bonds represent a 100% investment in long-term government bonds.

When the stock and bond asset classes were combined into an equally-weighted portfolio, the portfolio experienced less volatility than stocks alone and still maintained an attractive return. Notice that stock returns were up at times when bond returns were down, and vice versa. These offsetting movements assisted in reducing portfolio volatility (risk).

Diversification does not eliminate the risk of experiencing investment losses. Government bonds are guaranteed by the full faith and credit of the United States government as to the timely payment of principal and interest, while stocks are not guaranteed and have been more volatile than bonds.

About the data

Stocks in this example are represented by the Standard & Poor’s 500®, which is an unmanaged group of securities and considered to be representative of the stock market in general and bonds by the 20-year U.S. government bond. Annual rebalancing is assumed in the 50% stocks/50% bonds portfolio. An investment cannot be made directly in an index. The data assumes reinvestment of all income and does not account for taxes or transaction costs.

Case Study 10 minutes

7. Portfolio 1 vs. Portfolio 2 -- Enhancing Diversification Using Real Assets

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Enhancing Diversification Using Real Assets

In light of significant losses during the 2007–2009 crisis that left many investors unable to retire at the planned time, portfolio management strategies started to focus less on risk management/risk aversion and more on loss aversion. In economics, loss aversion is defined as an investor’s tendency to strongly prefer avoiding losses when compared to acquiring gains. In other words, a $100 loss has more significant impact than a $100 gain.

Adding real assets can serve as one way to enhance diversification and to potentially contain losses. When used in conjunction with stocks and bonds, real assets can potentially reduce overall portfolio long-term risk and possibly limit downside potential. This is one strategy an investor can use to help achieve loss aversion. These assets have the potential to deliver equity-like returns, but due to lower correlation with U.S. equities, they help cushion the portfolio against losses when the stock market experiences a downturn. Altering a traditional asset mix to include real assets can serve as a potential means to loss aversion.

The image displays how a diversification strategy enhanced with real assets could be applied by examining two portfolios over the “lost decade.” For example, with only a few changes, a financial advisor could transition a client from a traditional moderate portfolio to a diversified portfolio incorporating real assets (REITs and commodities) and TIPS to help protect against inflation. The analysis assumes that both portfolios started out with $100,000 in 2000. In 2008, the traditional portfolio was hit harder, sustaining a loss of $31,091. The real-assets-added portfolio sustained a much smaller loss—only $3,697. If an investor had been planning to retire at the end of 2008, a loss of about $4,000 probably would have hurt, but not enough to cause a change in plans. A loss of about $30,000, however, would probably have led the investor to postpone retirement for a few more years. 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.

Diversification does not eliminate the risk of experiencing investment losses. An investment cannot be made directly in an index. Government bonds and Treasury bills are guaranteed by the full faith and credit of the United States government as to the timely payment of principal and interest, while stocks are not guaranteed. Small stocks are more volatile than large stocks, are subject to significant price fluctuations, business risks, and are thinly traded. REITs are subject to certain risks, such as risks associated with general and local economic conditions, interest rate fluctuation, credit risks, liquidity risks and corporate structure. Transactions in commodities carry a high degree of risk, and a substantial potential for loss. In light of the risks, you should undertake commodities transactions only if you understand the nature of the contracts (and contractual relationships) you are entering into, and the extent of your exposure to risk. Trading in commodities is not suitable for many members of the public. You should carefully consider whether this type of trading is appropriate for you in light of your experience, objectives, financial resources and other relevant circumstances. International investments involve special risks such as fluctuations in currency, foreign taxation, economic and political risks, liquidity risks, and differences in accounting and financial standards. TIPS carry individual and unique risks. 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.

About the data

Large stocks are represented by the Standard & Poor’s 500®, which is an unmanaged group of securities and considered to be representative of the stock market in general; Small stocks by the performance of the Dimensional Fund Advisors, Inc. (DFA) U.S. Micro Cap Portfolio; International stocks by the Morgan Stanley Capital International Europe, Australasia, and Far East (EAFE®) Index; Bonds by the 20-year U.S. Government bond; REITs by the FTSE NAREIT All Equity REIT Index®; Commodities by the Morningstar Long-Only Commodity Index, and TIPS by the Morningstar TIPS Index.

Slide 8 5 minutes

8. Stocks and Bonds: Risk vs. Return

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Stocks and Bonds: Risk Versus Return 1970–2010

An efficient frontier represents every possible combination of assets that maximizes return at each level of portfolio risk and minimizes risk at each level of portfolio return.

An efficient frontier is the line that connects all optimal portfolios across all levels of risk. An optimal portfolio is simply the mix of assets that maximizes portfolio return at a given risk level. This image illustrates an efficient frontier for all combinations of two asset classes: stocks and bonds.

Although bonds are considered less risky than stocks, the minimum risk portfolio does not consist entirely of bonds. The reason is that stocks and bonds are not highly correlated; that is, they tend to move independently of each other. Sometimes stock returns may be up while bond returns are down, and vice versa. These offsetting movements help to reduce overall portfolio volatility (risk).

As a result, adding just a small amount of stocks to an all-bond portfolio actually reduced the overall risk of the portfolio. However, including more stocks beyond this minimum point caused both the risk and return of the portfolio to increase.

Diversification does not eliminate the risk of experiencing investment losses. Government bonds are guaranteed by the full faith and credit of the United States government as to the timely payment of principal and interest, while stocks are not guaranteed and have been more volatile than bonds.

About the data

Stocks in this example are represented by the Standard & Poor’s 500®, which is an unmanaged group of securities and considered to be representative of the stock market in general and bonds by the 20-year U.S. government bond. Risk and return are based on annual data over the period 1970–2010 and are measured by standard deviation and arithmetic mean, respectively. Standard deviation measures the fluctuation of returns around the arithmetic average return of the investment. The higher the standard deviation, the greater the variability (and thus risk) of the investment returns. An investment cannot be made directly in an index. The data assumes reinvestment of all income and does not account for taxes or transaction costs.

Case Study 10 minutes

9. More Funds do not always mean greater diversification

Equity Portfolio A vs. Equity Portfolio B

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More Funds Do Not Always Mean Greater Diversification

Holdings-based style analysis can be used to determine security overlap.

The image illustrates two different equity portfolios that individually comprise five mutual funds. Each oval within the style box represents an ownership zone of a mutual fund, which accounts for 75% of the fund’s holdings. The level of diversification provided by each portfolio is quite different.

The funds in Portfolio A significantly overlap with one another, indicating that each fund may hold stocks sharing similar style characteristics. While some overlap is acceptable in a portfolio, too much of it defeats the purpose of using multiple funds to create a diversified portfolio. In contrast, Portfolio B contains funds that span across many different styles. While the holdings in Portfolio A are more concentrated in the giant and large-cap value and core segments, the holdings in Portfolio B are widely distributed among different investment styles.

While not all investment styles are appropriate for all investors, it is important to be aware of the range of investment options and the possibility of security overlap when constructing a diversified portfolio.

Source: Morningstar.

Slides 10-13 10 minutes

10. Asset Class Winners and Losers

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Asset-Class Winners and Losers

It is impossible to predict which asset class will be the best or worst in any given year. The performance of any given asset class can have drastic periodic changes. This image illustrates the annual performance of various asset classes in relation to one another. In times when one asset class dominates all others, as was the case for large stocks in the late 1990s, it is easy to lose sight of the fact that historical data shows it is impossible to predict the winners for any given year.

Investors betting on another stellar performance for large stocks in 1999 were certainly disappointed, as small stocks rose from the worst-performing asset class in 1998 to the best-performing one in 1999. Similarly, international stocks were the top performers from 2004 to 2007, disastrously sank to the bottom in 2008, and rebounded to the top position once again in 2009. These types of performance reversals are evident throughout this example.

Although investing in a diversified portfolio may prevent an investor from capturing top-performer returns in any given year, this strategy can also protect an investor from experiencing extreme losses. For example, in 2010 a diversified portfolio would have returned 13.6%, which was approximately 17.7% lower than the top asset class that year—small stocks. However, the diversified portfolio would also have performed better than the worst-performing asset class—Treasury bills—by about 13.5% this past year. A well-diversified portfolio allows investors to mitigate some of the risks associated with investing. By investing a portion of a portfolio in a number of different asset classes, portfolio volatility may be reduced.

Diversification does not eliminate the risk of experiencing investment losses. Government bonds and Treasury bills are guaranteed by the full faith and credit of the United States government as to the timely payment of principal and interest, while stocks are not guaranteed and have been more volatile than the other asset classes. Furthermore, small stocks are more volatile than large stocks and are subject to significant price fluctuations, business risks, and are thinly traded. International investments involve special risks such as fluctuations in currency, foreign taxation, economic and political risks, liquidity risks, and differences in accounting and financial standards.

About the data

Small stocks are represented by the fifth capitalization quintile of stocks on the NYSE for 1996–1981 and the Dimensional Fund Advisors, Inc. (DFA) U.S. Micro Cap Portfolio thereafter. Large stocks are represented by the Standard & Poor’s 500®, which is an unmanaged group of securities and considered to be representative of the stock market in general, government bonds by the 20-year U.S. government bond, Treasury bills by the 30-day U.S. Treasury bill, and international stocks by the Morgan Stanley Capital International Europe, Australasia, and Far East (EAFE®) Index. An investment cannot be made directly in an index. The data assumes reinvestment of all income and does not account for taxes or transaction costs. The diversified portfolio is equally weighted between small stocks, large stocks, long-term government bonds, Treasury bills, and international stocks.

11. Correlation can help evaluate potential diversification benefits

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Correlation Can Help Evaluate Potential Diversification Benefits

A well-diversified portfolio should consist of individual investments that behave differently.

It is possible to determine how closely two asset classes move together by evaluating their correlation. 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. For example, small stocks and large stocks have risen and fallen to the same market conditions. Their high correlation suggests combining them may do little to lower the risk of a portfolio. In contrast, the negative correlation of small stocks and intermediate-term government bonds illustrates the potential for better diversification. Investments still need to be evaluated for investor suitability, but understanding asset class behavior may help enhance the diversification benefits of investor portfolios.

Government bonds and Treasury bills are guaranteed by the full faith and credit of the United States government as to the timely payment of principal and interest, while stocks are not guaranteed and have been more volatile than bonds. Furthermore, small stocks are more volatile than large stocks and are subject to significant price fluctuations, business risks, and are thinly traded. Diversification does not eliminate the risk of experiencing investment losses.

About the data

Small stocks are represented by the fifth capitalization quintile of stocks on the NYSE for 1926–1981 and the performance of the Dimensional Fund Advisors, Inc. (DFA) U.S. Micro Cap Portfolio thereafter. Large stocks are represented by the Standard & Poor’s 500®, which is an unmanaged group of securities and considered to be representative of the stock market in general. Corporate bonds are represented by the Ibbotson Associates U.S. long-term high-grade corporate bond index, long-term government bonds by the 20-year U.S. government bond, intermediate-term government bonds by the five-year U.S. government bond, and Treasury bills by the 30-day U.S. Treasury bill. An investment cannot be made directly in an index.

12. Diversification in Bull and Bear Markets

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Diversification in Bull and Bear Markets

Diversification is the strategy of combining distinct asset classes in a portfolio in order to reduce overall portfolio risk.

The graph on the left illustrates the hypothetical growth of $1,000 in stocks, bonds, and a 50% stock/50% bond diversified portfolio from October 2002 to October 2007. Stocks provided increased growth in bull markets. It is important to understand, however, that this greater wealth was achieved with considerable volatility in stocks compared to the diversified portfolio.

The significance of holding a diversified portfolio is most apparent when one or more asset classes are out of favor. The graph on the right illustrates the hypothetical growth of $1,000 in stocks, bonds, and a diversified portfolio between November 2007 and February 2009.

Notice that by diversifying among the two asset classes, the diversified portfolio experienced less severe monthly fluctuations than stocks or bonds alone. While bond prices tend to fluctuate less than stock prices, they are still subject to price movement. By investing in a mix of asset classes such as stocks, bonds, and Treasury bills, you may insulate your portfolio from major downswings in a single asset class. One of the main advantages of diversification is that it makes you less dependent on the performance of any single asset class.

Diversification does not eliminate the risk of experiencing investment losses. Government bonds and Treasury bills are guaranteed by the full faith and credit of the United States government as to the timely payment of principal and interest, while stocks are not guaranteed and have been more volatile than bonds.

About the data

Stocks in this example are represented by the Standard & Poor’s 500®, which is an unmanaged group of securities and considered to be representative of the stock market in general, and bonds by the 20-year U.S. government bond. An investment cannot be made directly in an index. The data assumes reinvestment of income and does not account for taxes or transaction costs. The bull market analyzed is defined by the time period October 2002—October 2007, and the bear market by the time period November 2007—February 2009.

13. Diversified Portfolios in Various Market Conditions

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Diversified Portfolios in Various Market Conditions

Diversification can limit your losses during a severe market decline.

The benefits of diversification are most evident during bear markets. This image illustrates the growth of stocks versus a diversified portfolio during two of the worst performance periods in recent history.

The blue line illustrates the hypothetical growth of $1,000 invested in stocks during the mid-1970s recession and the 2007–2009 bear market (including its aftermath up to December 2010). The gray line illustrates the hypothetical growth of $1,000 invested in a diversified portfolio of 35% stocks, 40% bonds, and 25% Treasury bills during these same two periods.

Over the course of both time periods, the diversified portfolio lost less than the pure stock portfolio. Over longer periods of time, the more volatile single asset-class portfolio is likely to outperform the less volatile diversified portfolio. However, you should keep in mind that one of the main advantages of diversification is reducing risk, not necessarily increasing return, over the long run.

Diversification does not eliminate the risk of experiencing investment losses. Government bonds and Treasury bills are guaranteed by the full faith and credit of the United States government as to the timely payment of principal and interest, while stocks are not guaranteed and have been more volatile than the other asset classes.

About the data

Stocks in this example are represented by the Standard & Poor’s 500®, which is an unmanaged group of securities and considered to be representative of the stock market in general. Bonds are represented by the 20-year U.S. government bond, and Treasury bills by the 30-day U.S. Treasury bill. The mid-1970s recession occurred from January 1973 through June 1976. The 2007–2009 bear market began in November 2007 and reached a trough in March 2009. As of December 2010, no official recovery has been established (meaning that the market has not recovered its pre-crisis value). An investment cannot be made directly in an index. The data assumes reinvestment of income and does not account for taxes or transaction costs.

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V. VII. Unauthorized Entities

An entity that is required to be licensed or registered with the Florida Office of Insurance Regulation but is operating without the proper authorization is identified as an unauthorized insurer. All persons have the responsibility of conducting reasonable research to ensure they are not writing policies or placing business with an unauthorized insurer. Any person who, directly or indirectly, aid or represent an unauthorized insurer can lose their licenses or face other disciplinary sanctions. Please see section 626.901, Florida Statutes, to read the laws. Lack of careful screening can result in significant financial loss to Florida consumers due to unpaid claims and/or theft of premiums. Under Florida law, a person can be charged with a third-degree felony and also held liable for any unpaid claims and refund of premiums when representing an unauthorized insurer. It is the person’s responsibility to give fair and accurate information regarding the companies they represent.

We recommend the following procedures when researching whether an insurer is properly licensed to transact insurance in Florida. The simple procedures outlined below will easily identify those insurance companies presently authorized to conduct insurance business in Florida.

1. Make sure you have the complete and correct name of the insurance company. Many insurance company names are very similar.

2. Go to .

3. Enter the insurance company’s name and click on the “Search” button.

4. Confirm that the insurance company as identified in step 1 is listed and authorized to conduct the line of business contemplated. Depending on the line of business, the following Authorization Types confer authority:

i. Certificate of Authority

ii. Information Only

iii. Letter of Approval

iv. Letter of Eligibility

v. Letter of Registration

vi. License

vii. Provisional Certificate of Authority

viii. Residual Market

Insurance companies shown with an Authorization Status as “Active” and Authorization Type as “Permit” have only begun the authorization process, and are NOT authorized to conduct insurance business.

If the insurance company is not listed on the web site or the insurance company is shown with an Authorization Type not listed above, the agent should not place insurance business with that company. Also, be aware that just because an insurance company is authorized today does not mean it will necessarily remain authorized in the future. Always check. To alert us of possible unauthorized insurance being sold please notify us at askDFS@.

5 minutes

14. Questions and Answers. 10 minutes

Total = 65 minutes

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