© 2009 Morningstar, Inc. All rights reserved. 3/1/2009 Stocks and Bonds.

© 2009 Morningstar, Inc. All rights reserved. 3/1/2009

Stocks and Bonds

MORNINGSTAR

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Investing in Stocks


Ownership in a corporation Voting rights Historically higher returns More risk

Stock Market Performance1926–2008

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. © 2009 Morningstar, Inc. All rights reserved. 3/1/2009

11.7%9.6

Compound annual return

$100k

10k

1k

100

10

1

0.10

1996 20061986197619661956194619361926

$9,549

$2,049• Small stocks• Large stocks

Small Stock Annual Returns Relative to Large Stocks1926–2008

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. © 2009 Morningstar, Inc. All rights reserved. 3/1/2009

-60

-40

-20

0

20

40

60

80

100% Excess return

1996 20061986197619661956194619361926

• Small stocks outperform large stocks• Large stocks outperform small stocks

–20

–10

0

10

20

30

40

50%

19961998

20032005

19611963

19681970

19751977

19821984

19891991

19261928

19331935

19401942

19471949

19541956

Small and Large Stock Performance Tends to Go in Cycles36-month rolling period returns 1926–2008


• Small stock excess return

JanDec

Risk of Stock Market Loss Over Time1926–2008


One-year returns

5-year annualized returns

15-year annualized returns

Each bar represents the average return for the preceding 5-year time period.

Each bar represents the average return for the preceding 15-year time period.

50%

0

50%

0

50%

0

1926 1936 1946 1956 1966 1976 1986 1996 2006

• Periods with gain • Periods with loss

86%

14%

100%

29%

71%

Stock Diversification


1 2 4 6 8 16 30 50 100 1000

Risk

• Company risk

• Market risk

Number of stocks in portfolio

Benefits of Bonds in a Portfolio


Potential growth Historically lower risk Diversification benefits Income generation Expand efficient opportunities

Bond Market Performance1926–2008

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. © 2009 Morningstar, Inc. All rights reserved. 3/1/2009

$20.53

$29.69

$99.16

$115.15$157.44

$2,049.45

$10,000

1,000

100

10

1

0.10

9.6% 6.35.95.74.23.7

Compound annual return

• Stocks• High-yield corp bonds• Corporate bonds• Government bonds• Municipal bonds• Treasury bills

1926 1936 1946 1956 1966 1976 1986 1996 2006

Relationship Between Bond Prices and YieldsWhen yields increase, bond prices decrease


2

4

6

8

10

12

14

16%

0

0.20

0.40

0.60

0.80

1.00

1.20

1.40

$1.60

1996 20061986197619661956194619361926

• Bond prices ($)• Bond yields (%)

Bonds Produced Greater Income1970–2008


Stocks Bonds

• Capital appreciation

• Income

30%

68%

2%

76%

19%5%

• Reinvestment of income

Bonds Expand Efficient Opportunities1970–2008

Past performance is no guarantee of future results. Risk is measured by standard deviation. Risk and return are based on annual data over the period 1970–2008. Portfolios presented are based on modern portfolio theory. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2009 Morningstar, Inc. All rights reserved. 3/1/2009

5% Risk 7 9 11 13 15 17 19 21 23 25

15% Return

14

13

12

11

10

9

8

• Stock portfolios

• Stock and bond portfoliosSmall stocks

Large stocks

Bonds

Adding a Bond Allocation to Diversify1970–2008

Past performance is no guarantee of future results. Risk is measured by standard deviation. Risk and return are based on annual data over the period 1970–2008. Portfolios presented are based on modern portfolio theory. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2009 Morningstar, Inc. All rights reserved. 3/1/2009

45%

50%

5%

Return 9.5%Risk 9.1%

Lower risk portfolio

30%

70%

Return 9.5%Risk 12.9%

Original portfolio

• Stocks• Bonds• Cash

Risk Versus ReturnStocks, bonds, and bills 1926–2008

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. © 2009 Morningstar, Inc. All rights reserved. 3/1/2009

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

2007

11.6

9.9

5.5

4.7

–5.2

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

8.1% 37.6 23.0 33.4 28.6 29.8 21.5 22.8 17.8 60.7 20.7 14.0 26.9

3.9 34.5 17.6 22.8 20.3 27.3 5.9 3.8 1.6 39.2 18.4 7.8 16.2

3.1 31.7 6.4 15.9 13.1 21.0 –3.6 3.7 –13.3 28.7 10.9 5.7 15.8

1.3 11.6 5.2 5.3 4.9 4.7 –9.1 –11.9 –15.7 1.4 8.5 4.9 4.8

–7.8 5.6 –0.9 2.1 –7.3 –9.0 –14.0 –21.2 –22.1 1.0 1.2 3.0 1.2

Asset-Class Winners and Losers


Highestreturn

Lowestreturn

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

2008

25.9

1.6

–36.7

–37.0

–43.1

© 2009 Morningstar, Inc. All rights reserved. 3/1/2009 Stocks and Bonds.

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Transcript of © 2009 Morningstar, Inc. All rights reserved. 3/1/2009 Stocks and Bonds.