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Opposites Attract

Each asset class exhibits unique characteristics
A well-diversified portfolio should consist of individual investments that behave differently. Ideally, as one investment performs poorly, another does well. The extent to which different investment returns move together over time can be measured by a statistic called correlation.

Correlation can help evaluate complementary investments
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.
Compatability Test

 

Keep in mind that an investment cannot be made directly in an index, and past performance is no guarantee of future results.This is for illustrative purposes only and not indicative of any investment.

Diversify with asset classes that behave differently
For people that are looking to diversify a large stock portfolio, the above graph shows a wide variety of investment options. While diversification does not eliminate the risk of investment losses, introducing assets with lower correlation to a portfolio may soften the impact of market swings.

Source: ©2007 Morningstar, Inc. All rights reserved. Used with permission.

Note: with corporate bonds, an investor is a creditor of the corporation and the bond is subject to default risk. High yield bonds exhibit significantly more risk of default than investment grade corporate bonds. Stocks are not guaranteed and have been more volatile than the other asset classes. Small company stocks are more volatile than large company 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.

Source: Large Stocks — Standard & Poor's 500®, which is an unmanaged group of securities and considered to be representative of the stock market in general; Mid Cap Stocks — NYSE/AMEX/NM Deciles 3-5, CRSP Cap-Based Indices™, Center for Research in Security Prices at the University of Chicago's Graduate School of Business; Small Company Stocks — represented by the fifth capitalization quintile of stocks on the NYSE for 1977- 1981 and the performance of the Dimensional Fund Advisors, Inc. (DFA) U.S. Micro Cap Portfolio thereafter; International Stocks — Morgan Stanley Capital International Europe, Australasia, and Far East (EAFE®) Index; REITS — National Association of Real Estate Investment Trusts®(NAREIT) Equity REIT Index; High Yield Corporate Bonds — Ibbotson Domestic High Yield Index; Investment Grade Corporate Bonds — Salomon Brothers Long-Term High-Grade Corporate Bond Index; Government Bonds — 20-year U.S. Government Bond; Treasury Bills — 30-day U.S. Treasury Bill. The Northwestern Mutual Financial Network is a marketing name for the sales and distribution arm of The Northwestern Mutual Life Insurance Company, its affiliates and subsidiaries. Securities offered through Northwestern Mutual Investment Services, LLC (NMIS), member FINRA and SIPC. 1-866-664-7737. NMIS is a wholly owned company of Northwestern Mutual. Northwestern Mutual is not a broker-dealer.

Bonds and other debt obligations are affected by changes in interest rates, inflation risk and the creditworthiness of their issuers. High yield bonds generally have greater price swings and higher default risks than investment grade bonds. Return of principal is not guaranteed. In contrast to owning individual bonds, there are ongoing fees and expenses associated with owning shares of bond funds. When interest rates rise, bond prices fall. With a fixed income fund, when interest rates rise, the value of the fund's existing bonds drops, which could negatively affect overall fund performance. No investment strategy can guarantee a profit or protect against a loss.

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Copyright 2008, The Northwestern Mutual Life Insurance Company/Northwestern Mutual, Milwaukee, WI. All rights reserved. 720 East Wisconsin Avenue, Milwaukee, Wisconsin 53202-4797 - (414) 271-1444. The Northwestern Mutual Financial Network is a marketing name for the sales and distribution arm of The Northwestern Mutual Life Insurance Company, its affiliates and subsidiaries.