Asset Class Outlook

1 Alternative Investments and Stocks trading less than $4 align with the Aggressive investment category, but they are not recommended.

2 Large-cap stocks that do not pay a dividend are in the Growth investment category.

Asset classes we don’t recommend separately include alternative investments, micro-cap equities and international high-yield bonds.

Equity versus Fixed Income (Target = Middle) – We think the bull market in stocks can continue, supported by modest economic growth and slow-but-accelerating earnings growth. Interest rates remain low, and the Federal Reserve will likely stand pat after having cut interest rates to help extend the expansion. A laddered bond portfolio and an above-average amount in cash may help provide downside protection for portfolios when markets are volatile.

Domestic versus International (Target = Middle) – We recommend overweighting international equities (including emerging-market stocks) and underweighting international fixed income. Global growth remains slow, but the outlook is improving, in our view, and international equities look attractive due to low valuations.

Asset Class Diversification

Aggressive (Target = Middle): We remain cautious on commodity investments but recommend adding emerging-market equities, which we think are attractively valued and could benefit if trade tensions ease and global growth improves.

Growth (Target = Middle): Opportunities and risks appear balanced for U.S. small- and mid-cap stocks and international small-cap stocks as concerns about slower economic growth are offset by low interest rates and easy monetary policy.

Growth & Income (Target = Middle): We think risks and opportunities are balanced for real estate investments and U.S. large-cap stocks. We recommend overweighting international developed-market large-cap equities, within the recommended range of international equity holdings, because expectations are low, dividend yields are attractive, and we expect them to benefit from policies to improve global economic growth.

Income (Target = Low): Long-term interest rates tend to move with inflation, which may rise slightly as labor markets tighten. The aggressive income target is middle because we think rates on high-yield bonds compensate for their additional risk and default rates remain low. We think international fixed income looks relatively unattractive due to very low foreign interest rates.

Cash (Target = High): We recommend overweighting cash to cover short-term expenses and to invest during pullbacks.

Important Information:

Investors should understand the risks involved in owning investments, including interest rate risk, credit risk and market risk. The value of investments fluctuates, and investors can lose some or all of their principal. The prices of small-cap, mid-cap and emerging-market stocks are generally more volatile than those of large company stocks. Special risks are inherent in international investing, including those related to currency fluctuations and foreign political and economic events.

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