TARGET ALLOCATION PORTFOLIOS

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1 TARGET ALLOCATION PORTFOLIOS A convenient single-solution approach to investing Life and work are so busy these days, it s no wonder that investment planning often falls to the bottom of the list. Your plan s Target Allocation Portfolios offer a single-choice approach to retirement investing and an easy way to achieve immediate diversification based on your risk profile. Each of the Target Allocation Portfolios is named for its exposure to stocks. For example, Target 20 maintains an equity allocation of around 20%, while Target 85 maintains an equity allocation of around 85%. Conservative Moderate/Balanced Aggressive Stocks 20% 30% 40% 50% 60% 70% 85% Bonds 80% 70% 60% 50% 40% 30% 15% Stocks Bonds Stocks Bonds Stocks Bonds Stocks Bonds Stocks Bonds Stocks Bonds Stocks Bonds Principles of Investment Success Markets are unpredictable, but savvy investors focus on things they can control: Asset Allocation A sound investment strategy starts with a suitable mix of more conservative investments, like bonds, and higher risk investments, like stocks. The asset mix largely determines the Spectrum of Returns (the average returns and the magnitude of ups and downs along the way). Diversification The portfolio should be broadly diversified across bond and stock types to avoid unnecessary risks and to capture opportunities. Expenses The lower your costs, the greater your share of an investment s return. Lower cost investments have tended to outperform higher cost alternatives. Discipline Investing can provoke strong emotions. In the face of market turmoil, which is unpredictable and unavoidable, some investors may make impulsive decisions or become paralyzed, subtracting from long-term returns. Thompson Wealth Management, Ltd. 1

2 A target risk portfolio both strengthens and simplifies your investment choice The portfolios combine funds from your plan s investment menu in an asset allocation framework, providing broad diversification among equities, bonds and short-term investments. Each portfolio targets a distinct level of risk and return, ranging from conservative to aggressive. You may switch between portfolios, though frequent switching is not advised. You may choose one target portfolio and you can t mix them with other funds in the plan. Risk is primarily determined and managed through the asset allocations and extremely broad diversification of the portfolios. There is no active management involved. Rebalancing each portfolio is rebalanced periodically to maintain its specific asset allocation, freeing you from the hassle of ongoing rebalancing. There is a slight weighting toward small cap and value stocks to take advantage of the historically higher returns in these categories. Portfolios are index-centric by nature, providing dependable, consistent, low-cost asset allocation. The portfolios expense ratios average.20% to.27%; the industry average expense ratio for comparable funds is 1.26%. (Source: Vanguard). The returns should closely approximate the benchmark since the model is primarily composed of index funds, and there is no tactical allocation that changes with market valuation or other conditions. Thompson Wealth Management, Ltd. 2

3 How do I choose the right Target Allocation? For investors who: Stocks 20% 30% 40% 50% 60% 70% 85% Bonds 80% 70% 60% 50% 40% 30% 15% Value low risk & stability of principal; willing to accept a small amount of exchange for modest growth/inflation protection Value low risk; willing to accept a small amount of exchange for enough growth to offset cost of living increases over time Value a balance between market risk & real growth to stay ahead of inflation; emphasis still on stability Value a balance Value a balance between market risk between market risk & real growth; & real growth; slight willing to accept emphasis on growth moderate market risk Value long term growth over stability; willing to accept added exposure to stock market risk Value aggressive growth; willing to accept significant exposure to stock exchange for growth Time horizon* <5 years <5 years >5 years 5 to 10 years 5 to 10 years >10 years >10 to 15 years Risk Tolerance Survey Estimated 10 Year Return** Historical Return Range: 1 Year*** Historical Return Range: 10 Years Conservative Moderate/Balanced Aggressive Stocks Bonds Stocks Bonds Stocks Bonds Stocks Bonds Stocks Bonds Stocks Bonds Stocks Bonds to 5% 5 to 5.5% 5.5 to 6% 6 to 6.5% 6.5 to 7% 7 to 7.5% 8 to 8.5% -13% to 27% -17% to 30% -20% to 34% -24% to 37% -28% to 41% -32% to 43% -38% to 49% 1% to 14% 1% to 15% 0% to 16% 0% to 16% 0% to 17% -1% to 18% -1% to 19% * Number of years before needing to withdraw approximately a total of 20% of your principal **TWM's return expectation represents a real world discount to actual historical returns for current low interest rates. This estimate is not to be construed as a forecast or a guarantee, but as a guide to help you make a realisitic assessment of risk and return. You should carefully consider historical returns and volatility for each allocation. ***The return data is for index portfolios comprised of U.S. stocks and bonds only, source Ibbotson SSBI 1926 to Choosing a target allocation starts with understanding your risk tolerance, time horizon and investment goals. Click here to complete a Risk Tolerance Survey and receive a suggested allocation. Because stocks are considered to be more volatile than bonds or short-term investments, Target 20 may be more suitable for investors who have short time horizons or are much more concerned about the impact of market fluctuations than inflation. Because bonds and short-term investments don t provide growth potential to offset inflation, a risk that increases with time, Target 85 is more suitable for those who have very long time horizons and are not apt to react impulsively when stocks decline. We define time horizon as the number of years until you need to withdraw a total of 20% of your money. If you are retired and plan to withdraw 4% per year, your time horizon is 5 years. If you are younger, but there is a chance you will need to withdraw money to meet an emergency or other goals, you should evaluate your time horizon accordingly. Likewise, older investors in a very strong financial position my have a longer time horizon than age implies. Select an allocation that you are prepared to stick with; see the historical returns and Spectrum of Returns given below. To use an old adage, avoid the position of a seller in a buyers market, or the temptation of a buyer in a sellers market. Discuss your asset allocation, risk tolerance and financial situation with a TWM adviser during your annual one on one consultation, or sixmonth check in call. Thompson Wealth Management, Ltd. 3

4 The mixture of assets defines the spectrum of returns $16,000 $14,000 $12,000 $10,000 $8,000 $6,000 $4,000 $2,000 $0 $12,704 $13,041 $13,378 $13,715 $14,052 $14,389 $14,895 $10,472 $10,523 $10,567 $10,618 $10,694 $10,744 $10,820 $8, $8, Spectrum of 1 Year Returns % 30.4% 33.8% 37.2% 40.5% 43.9% 48.9% 6.2% 6.7% 7.2% 7.7% 8.4% 8.9% 9.7% -12.8% -16.6% -20.4% -24.2% -28.1% -31.9% -37.6% Worst 1 Year -12.8% -16.6% -20.4% -24.2% -28.1% -31.9% -37.6% Best 1 Year 27.0% 30.4% 33.8% 37.2% 40.5% 43.9% 48.9% Average 1 Year 6.2% 6.7% 7.2% 7.7% 8.4% 8.9% 9.7% RANGE OF VALUES: $10,000 $7, $7, $7, $6, $6, The charts to the left demonstrate how asset allocation affects the variability of returns. Each bar shows the best and worst one-year returns with the average return in the middle. The second chart shows the historical one year range of values for each allocation. Why not minimize potential losses by using a low risk portfolio? Because assuming too little risk can result in failure to stay ahead of inflation or achieve long-term goals. On the other hand, assuming too much risk can lead to levels of portfolio volatility so high that you may want to abandon your strategy. Performance is quick to change among bond and stock sectors, for example between U.S. and foreign equities. A portfolio that diversifies across markets is less vulnerable to the impact of swings in the performance of any one sector. About the Data: The investment returns are historical returns for US stocks and intermediate bonds as provided in Ibbotson SSBI Yearbook (1926 to 2014). All investing is subject to risk, including possible loss of principal. Past performance does not guarantee future results. The allocations provided are based on generally accepted investment principles. There is no guarantee, however, that any particular asset allocation or mix of funds will meet your investment objectives. Diversification does not insure a profit or protect against a loss. The performance of an index or combination of indexes is not an exact representation of the Target Allocation Portfolios, as you cannot invest directly in an index. The investments in the Target Allocation Portfolios will differ meaningfully from the indexes and returns presented here. Thompson Wealth Management, Ltd. 4

5 Spectrum of 5 Year Returns 26.7% 18.6% 19.9% 21.1% 22.4% 23.6% 24.9% 6.3% 6.8% 7.2% 7.7% 8.1% 8.6% 9.3% -1.7% -3.1% -4.4% -5.8% -7.1% -8.5% -10.5% Spectrum of 10 Year Returns 19.0% 14.8% 15.5% 16.3% 17.1% 17.8% 14.0% 9.0% 9.7% 6.5% 7.0% 7.5% 8.0% 8.5% It s about time in the market, not market timing: The charts to the left demonstrate how the holding period affects the variability of returns this illustrates the concept of time diversification. Each bar shows the best and worst 5, 10 and 20 year returns with the average return in the middle. Note that as the time period becomes longer, the spectrum of returns the spread between the best and worst returns narrows. The suitability of a particular asset allocation is based on three factors: risk tolerance, risk capacity (financial situation, stability of employment and salary, etc.), and period of time before the funds are needed. The table below shows the odds of losing money over various holding periods. Note that the longer the holding period, the lower the odds of losing money. Based on historical results, an investor has about a 30% chance of losing money over a 1 year time horizon, but only a 10% chance over 10 years, and a 0% chance over 20 years. 0.8% 0.5% 0.2% -0.1% -0.3% -0.6% -1.0% Spectrum of 20 Year Returns 16.7% 14.6% 15.4% 11.3% 12.1% 12.9% 13.8% 9.5% 10.3% 6.6% 7.2% 7.8% 8.3% 8.9% 1.7% 1.9% 2.1% 2.3% 2.4% 2.6% 2.8% Thompson Wealth Management, Ltd. 5