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Diversification And Asset Allocation
Two terms you’ll hear when looking for an investment strategy are “diversification” and “asset allocation.” While they may have similar meanings, they are different approaches to investing.
Diversification is spreading your risk across asset classes of similar securities. The three core asset classes are stocks, bonds, and cash equivalents, but within each of these groups are classes based on the varying characteristics of the core class.
For example, stocks can be from large, small, or foreign companies while bonds may be issued by corporations or government entities and have long- or short-term maturities. Diversification does not assure a profit or protect against a loss in a declining market.
Diversifying A Portfolio
One way to diversify a portfolio is to purchase shares of three or four stock mutual funds with different objectives. Each mutual fund offers a diverse portfolio by itself, but you can get even more diversification by purchasing shares of funds with differing objectives. As the objectives differ, the chance of two or more mutual funds holding the same stocks is less.
Example Of Diversification
A mutual fund made up of the stocks of larger companies, such as the State Farm® Equity Fund, should not have the same stocks as one investing in small- or mid-sized companies like the State Farm Small/Mid Cap Equity Fund. The same could be said of a mutual fund that invests primarily in foreign stocks compared with a domestic stock mutual fund.
You should know that different objectives doesn’t necessarily mean different underlying securities. The State Farm Equity Fund may have a number of the same stocks found in the State Farm S&P 500 Index Fund because both invest in the stocks of large companies. Purchasing shares of both funds may not offer the diversification you’re seeking.
By distributing your investment among different types of stocks or bonds, you’re less likely to be affected by the volatility of the different markets. If small company stocks are down, your losses may be offset by gains in large company stocks and vice versa.
Asset allocation takes the concept one step further. By dividing your assets among the different asset classes, you’re able to take advantage of a wide variety of investments. You can invest some assets in higher risk stocks while placing others in corporate or government bonds, which are lower risk. Asset allocation does not assure a profit or protect against loss.
Example Of Asset Allocation
An example of asset allocation would be to purchase shares of a stock mutual fund like the State Farm Equity Fund along with shares of a bond mutual fund like the State Farm Bond Fund. Bonds and stocks will each have periods of highs and lows, but may not experience them at the same time. During periods when stocks are performing poorly, bond yields may increase.
You may also purchase shares of a money market fund, generally considered a lower risk than stocks or bonds, as part of an asset allocation strategy. Money market funds, such as the State Farm Money Market Fund, attempt to keep a share price of $1.00 and hold short-term investments like commercial paper, re-purchase agreements, and negotiable certificates of deposit.
By dividing your assets among a number of investment vehicles with varying risks, you may lessen the effects of market volatility. As your goals change, your investments may also change to become more or less aggressive and assume more or less risk.
Have Questions About Investing?
The answer is an easy one: Talk with your registered State Farm Agent who will discuss your current needs and opportunities and help you develop a plan to fit your goals. Simply click, call, or stop by an office in your neighborhood today!
Investing involves risk, including potential for loss.
An investment in the Money Market Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the Fund.Additional Disclosures
Mutual Funds Disclosures
Before investing, consider the funds' investment objectives, risks, charges and expenses. Contact State Farm VP Management Corp (1-800-447-4930) for a prospectus or summary prospectus containing this and other information. Read it carefully.
Automatic investment plans do not assure a profit or protect against loss.
Neither State Farm nor its agents provide investment, tax, or legal advice.
It is not possible to invest directly in an index.
State Farm VP Management Corp. is a separate entity from those State Farm entities which provide banking and insurance products.
As of June 2nd, 2010, additional fees may apply to certain accounts with balances less than $5000.
Each State Farm LifePath Fund invests all of its assets in a corresponding LifePath Master Portfolio under a master/feeder structure. BlackRock Fund Advisors (BFA) is the investment advisor to the LifePath Master Portfolios. State Farm Investment Management Corp. (SFIMC) is the investment advisor to the State Farm LifePath Funds. State Farm VP Management Corp. (SFVPMC) is the distributor of the State Farm LifePath Funds. Neither SFIMC or SFVPMC, or their affiliates, are affiliated with BFA or its affiliates.
BlackRock Investors Services (BIS) provides marketing support to the LifePath Master Portfolios. BFA and BIS are wholly owned subsidiaries of BlackRock Institutional Trust Company, N.A. (BTC). Neither BTC or its affiliates are affiliated with State Farm. BTC is located at 400 Howard Street, San Francisco, CA 94105.
BlackRock Fund Advisors (BFA) is the investment sub-advisor to the S&P 500 Index Fund.
Ascensus provides recordkeeping and administrative services for retail 401(k) retirement plans offered by State Farm Investment Management Corp.
Net Asset Value (NAV) is calculated by adding all of the assets of a Fund, subtracting the Funds liabilities, then dividing by the number of outstanding shares.
Money market mutual fund data is not available for funds other than the State Farm Money Market Fund.
The Russell 2000® Index tracks the common stock performance of the 2,000 smallest U.S. companies in the Russell 3000® Index.
The Russell 2500 Index tracks the 2,500 smallest companies in the Russell 3000 Index.
The Russell 1000 Index is a stock market index that represents the highest-ranking 1,000 stocks in the Russell 3000 Index.
The Russell Midcap Index measures the performance of the mid-cap segment of the US equity market and is a subset of the Russell 1000 Index.
The Dow Jones Industrial Average is an unmanaged average of 30 actively traded stocks.
The NASDAQ Composite is an unmanaged market capitalization weighted index that is designed to represent the performance of the National Market System.
The S&P 500® Index tracks the common stock performance of 500 large U.S. companies.
The S&P 1500 Index is a stock market index of U.S. stock that includes all stocks in the large cap S&P 500 Index, the mid cap S&P 400 Index, and the small cap S&P 600 Index.
The Morgan Stanley Capital International Europe, Australasia and Far East Free (EAFE® Free) Index currently measures the performance of stock markets of Europe, Australia, New Zealand, and the Far East.
The Morgan Stanley Capital International Europe Index is a free float-adjusted market capitalization index that is designed to measure developed market equity performance in Europe.
The Barclays 1-5 Year U.S. Treasury Index measures the performance of short-term U.S. Treasury Securities maturing within one to five years.
The Barclays U.S. Aggregate Bond Index represents debt securities in the U.S. investment grade fixed rate bond market.
The Barclays Municipal Bond Index is an unmanaged index representative of the tax-exempt bond market.
The Barclays High Yield Index includes all fixed income securities having a maximum quality rating from Moodys Investor Service of Ba1, a minimum amount outstanding of $100 million, and at least one year to maturity.
The Barclays TIPS Index measures the performance of the US Treasury Inflation-Protected Securities (TIPS) market.
The Citigroup 3 Month T-Bill Index is an average of the last 3-month Treasury bill issues (excluding the current month-end bill).
The FTSE EPRA/NAREIT Developed REIT and Non-Reit Index is a subset of the Developed Index, which is designed to track the performance of listed real estate companies and REITS worldwide.
The MSCI ACWI (All Country World Index) Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed and emerging markets.
The Nikkei 225 Index is a price-weighted index comprised of Japans top 225 blue-chip companies on the Tokyo Stock Exchange.
The Credit Suisse High Yield Index is designed to mirror the investible universe of the $U.S. Denominated high yield debt market.
The New York Stock Exchange is considered the largest equities-based exchange in the world based on total market capitalization of its listed securities.
The CBOE 10-Year Treasury Note (TNX) is based on 10 times the yield-to-maturity on the most recently auctioned 10-year Treasury note. The notes are usually auctioned every three months following the refunding cycle: February, May, August and November. The expiration period of these notes is three near-term months plus three additional months from the March quarterly cycle. The aggregate position and exercise limits are 25,000 contracts on the same side of the market.
The Blended Benchmark for the Equity and Bond Fund is a combination of 60% of the S&P 500 Index and 40% of the Barclays U.S. Aggregate Bond Index, rebalanced monthly.
The Blended Benchmark for the LifePath Funds is a combination of the holdings in the Barclays U.S Aggregate Bond Index, Russell 1000 Index, MSCI ACWI ex-U.S. Index, FTSE EPRA/NAREIT Developed Real Estate Index and Barclays TIPS Index. The weightings of the indices are adjusted quarterly to reflect the funds' changing asset allocations over time.
iShares and LifePath®, LifePath 2020®, LifePath 2030®, LifePath 2040®, and LifePath 2050® are all registered trademarks of BlackRock Institutional Trust Company, N.A. All other trademarks, service marks or registered trademarks are the property of their respective owners.
Standard & Poors®, S&P®, S&P 500®, Standard and Poors 500, and 500 are trademarks of The McGraw-Hill Companies, Inc. and have been licensed for use by State Farm Life Insurance Company, State Farm Life and Accident Assurance Company and the State Farm Variable Product Trust. Neither the Large Cap Equity Index Fund nor the Stock and Bond Balanced Fund is sponsored, endorsed, sold or promoted by Standard & Poors, and Standard & Poors makes no representation regarding the advisability of investing in the Large Cap Equity Index Fund or the Stock and Bond Balanced Fund.
The Russell 2000® Index is a trademark/service mark, and Russell is a trademark of the Frank Russell Company. The Small Cap Equity Index Fund is not sponsored, endorsed, sold or promoted by, nor in any way affiliated with the Frank Russell Company. Frank Russell Company is not responsible for and has not reviewed the Small Cap Equity Index Fund nor any associated literature or publications and Frank Russell Company makes no representation or warranty, express or implied, as to their accuracy, or completeness, or otherwise.
The EAFE® Free Index is a trademark, service mark and the exclusive property of Morgan Stanley Capital International, Inc. (MSCI) and its affiliates and has been licensed for use by the State Farm Variable Product Trust (the Trust). The International Equity Index Fund (the Fund), based on the EAFE® Free Index, has not been passed on by MSCI as to its legality or suitability, and is not issued, sponsored, endorsed, sold or promoted by MSCI. MSCI makes no warranties and bears no liability with respect to the Fund. MSCI has no responsibility for and does not participate in the management of the Fund assets or sale of the Fund shares. The Trusts Prospectus contains a more detailed description of the limited relationship MSCI has with the Trust and the Fund.
Each of the investment products and services referred to on the State Farm Mutual Funds web site is intended to be made available to customers or prospective customers residing in the United States. The customers U.S. permanent residence address must be a street address. This web site shall not be considered a solicitation or offering for any investment product or service to any person in any jurisdiction where such solicitation or offer would be unlawful.
Business Continuity Plan
State Farm VP Management Corp. has developed a Business Continuity Plan on how we will respond to events that significantly disrupt our business. Since the timing and impact of disasters and disruptions is unpredictable, we will have to be flexible in responding to actual events as they occur. With that in mind, download this information (PDF 27 KB) on our business continuity plan.
1-800-447-4930 Mutual Funds
1-888-702-2307 Variable Products
Not FDIC Insured