FEATURE

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DIVERSIFYING THROUGH MUTUAL FUNDS
A broadly diversified portfolio should include a variety of investments in three asset classes, depending on the time horizon of your goal and your risk tolerance. But the benefits of diversification may be limited unless your portfolio also has wide exposure to various combinations of sub-asset classes. The challenge lies in achieving and maintaining this level of diversification throughout your portfolio and over time—a process that requires knowledge, research, and the time to continually monitor the balance of holdings as asset prices shift.

DIVERSIFICATION CAN IMPROVE RETURNS

This chart compares the performances of two portfoliosa basic 60% stock/40% bond portfolio and a more diversified 60/40 portfoliofrom the start of April 2000 through the end of March 2013. The two portfolios are indexed to $100,000 at the start. Their asset allocations are listed in the chart. The outperformance of the more diversified portfolio over the entire time periodthrough two bear and two bull marketswas significant, with the more diversified portfolio delivering a total annualized return of 5.1% compared with 3.8% for the basic portfolio.

Diversification can improve returns

Note: The starting date of the beginning of April 2000 was chosen because it was the nearest whole month to the start of the first bear market since 1999. The indexes used for the more diversified portfolio include the Russell 1000 Index, the Russell 2000 Index, the MSCI EAFE Index, the MSCI EM Index, the Barclays U.S. Aggregate Bond Index, the Credit Suisse High Yield Index, the Barclays Global Aggregate ex-U.S. Dollar Bond Index, and the J.P. Morgan Emerging Markets Bond Index Global. The indexes used for the basic portfolio include the S&P 500 Index and the Barclays U.S. Aggregate Bond Index. Russell Investment Group is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. RussellĀ® is a trademark of Russell Investment Group. It is not possible to invest directly in an index.
Source: T. Rowe Price.

Mutual funds offer built-in diversification because they generally hold dozens to hundreds of investments aligned with a particular theme or goal. Teams of investment professionals that include portfolio managers and analysts make decisions seeking to optimize the balance of holdings within the fund. These decisions are based on thorough analysis of market conditions and security valuations that may not be apparent without research, accessibility, and expertise. Indeed, opportunities within financial markets may be contrary to the larger economic conditions in a holding's economic environment. In other words, a French or Italian company might offer an excellent investment opportunity despite economic challenges in its country or region. Investment teams decide how the holdings in the fund affect its overall balance.

KEEP YOUR PORTFOLIO BALANCED
To manage your overall investment portfolio on your own, look for sectors, geographic regions, and market capitalizations that are underrepresented in your portfolio. And be sure not to neglect diversification in the fixed income portion of your holdings. If you're underweight in one category, you have too much exposure to another. Correcting this imbalance is important because it lowers your exposure to sectors that have risen comparatively in value and increases your exposure to those that have declined—and that action helps you maintain a portfolio that is properly allocated and diversified. Not only can rebalancing lock in gains, it will keep you well positioned to balance market risks with growth potential.

1 Ibbotson® SBBI® Classic 2013 Yearbook.
2 MSCI Inc., December 2012.
3 Standard & Poor's, 2013.

1 An early start to saving may help you afford future college costs.
2 Stuart Ritter, CFP®, a senior financial planner with T. Rowe Price, explains that the amount you save toward retirement can have a dramatic impact on your retirement.
3 Don Peters, portfolio manager of the
T. Rowe Price Tax-Efficient Equity
Fund, discusses his strategies to minimize capital gains and maximize after-tax returns.
4 A Diversified Blend of Growth and Value.
5 Depending on the plan you choose, you and your employees can enjoy tax-advantaged savings, plus a broad range of investment choices.
6 Saving for college can help you meet the costs of higher education. And don’t overlook the important contribution grandparents can make.
7 T. Rowe Price FuturePathSM helps you see the impact of key decisions as you approach retirement.
8College Savings Plan receives Morningstar's highest rating; T. Rowe Price outperforms; Connections explores big trends.
9Powerful and innovative technology is set to become a bigger part of our lives—including robotics, genomic advances, and seamless device connectivity.
10The new tax laws exempt millions of middle-class taxpayers from the AMT. What steps can help you manage and minimize your exposure to the tax?
11How the fundamental benefits of creating an estate plan far outweigh the challenges of setting one up.
11A clear understanding of your portfolio's exposure to risk may allow you to maintain an appropriate long-term strategy.
11Compounding can generate wealth.