40/60 Strategic Allocation Portfolio, 4th Quarter 2017 Series
The 40/60 Strategic Allocation Portfolio is a unit investment trust that has been developed to provide investors with asset
allocation, diversification, and an annual rebalancing opportunity through a single investment. Along
with the professional guidance of a financial advisor, investors can choose a single Strategic Allocation
Portfolio to help them reach their investment goals given their individual risk/reward tolerance.
Weighing your risk tolerance as well as the investment return you want is very important. Discussing these factors, among others, with a
financial advisor can help you select one of the Strategic Allocation Portfolios that best suits your needs.
The Importance of Asset Allocation
Perhaps the most important investment decision is not the specific investments that are selected, but it's the manner in which the assets are allocated. Asset allocation is the process of developing a diversified investment portfolio by combining different assets in varying proportions. Spreading capital across a range of investments within each major asset class makes your portfolio less dependent on the performance of any single type of investment. Studies have shown that the number one factor contributing to a portfolio's performance is asset class selection and not security selection.*
Diversification makes your portfolio less dependent on the performance of any single asset class. The adjacent chart illustrates the annual performance of various asset classes in relation to one another over the past 20 years as well as a diversified portfolio consisting of an evenly-weighted combination of the asset classes. As you can see, the performance of any given asset class can have drastic changes from year to year making it nearly impossible, even for the most astute investors, to accurately predict the best combination of asset classes to maximize returns and minimize risk. It is important to keep in mind that diversification does not guarantee a profit or protect against loss.
The Relationship Between Risk and Return of Stocks & Bonds
As risk increases in an investment portfolio so do the return expectations. Investors can manage their risk tolerance through asset allocation and by selecting investments that meet their risk/return expectations. Effective asset allocation requires combining assets with low correlations—that is, those that have performed differently over varying market conditions. Investing in assets with low to negative correlation can reduce the overall volatility and risk within your portfolio and may also help to improve portfolio performance. The adjacent chart illustrates the effects of low correlation on the risk and return of varying combinations of stocks and bonds.
Return is measured by average annual total return and risk is measured by standard deviation for the 30 year period from 1987 to 2016. Standard deviation is a measure of price variability. The higher the standard deviation, the greater the variability (and thus risk) of the investment returns.
You should consider the portfolio's investment objectives, risks, and
charges and expenses carefully before investing. Contact your financial advisor
or call First Trust Portfolios, L.P. at 1.800.621.1675 to request a prospectus,
which contains this and other information about the portfolio. Read it carefully
before you invest.
An investment in these unmanaged unit investment trusts should be made with
an understanding of the risks involved with an investment in a portfolio of
common stocks and/or exchange-traded funds. (ETFs)
Common stocks are subject to certain risks, such as an economic recession and
the possible deterioration of either the financial condition of the issuers
of the equity securities or the general condition of the stock market.
ETFs are subject to various risks, including management's ability to meet the
fund's investment objective, and to manage the fund's portfolio when the underlying
securities are redeemed or sold, during periods of market turmoil and as investors'
perceptions regarding ETFs or their underlying investments change.Unlike open-end
funds, which trade at prices based on a current determination of the fund's
net asset value, ETFs frequently trade at a discount from their net asset value
in the secondary market.Certain ETFs may employ the use of leverage, which increases the
volatility of such funds.
An investment in a portfolio containing equity securities of
foreign issuers is subject to additional risks, including currency
fluctuations, political risks, withholding, the lack of adequate
financial information, and exchange control restrictions
impacting foreign issuers. Risks associated with investing in
foreign securities may be more pronounced in emerging
markets where the securities markets are substantially smaller,
less developed, less liquid, less regulated, and more volatile than
the U.S. and developed foreign markets.
All of the ETFs invest in investment grade
securities. Investment grade securities are
subject to numerous risks including higher
interest rates, economic recession, deterioration
of the investment grade market or investors'
perception thereof, possible downgrades and
defaults of interest and/or principal.
Certain of the ETFs invest in floating-rate
securities. A floating-rate security is an
instrument in which the interest rate payable
on the obligation fluctuates on a periodic basis
based upon changes in an interest rate
benchmark. As a result, the yield on such a
security will generally decline in a falling
interest rate environment, causing the trust to
experience a reduction in the income it
receives from such securities.
Certain of the ETFs invest in senior loans. The
yield on ETFs which invest in senior loans will
generally decline in a falling interest rate
environment and increase in a rising interest
rate environment. Senior loans are generally
below investment grade quality ("junk"
bonds). An investment in senior loans involves
the risk that the borrowers may default on
their obligations to pay principal or interest
Certain of the ETFs invest in preferred
securities. Preferred securities are equity
securities of the issuing company which pay
income in the form of dividends. Preferred
securities are typically subordinated to bonds
and other debt instruments in a company's
capital structure, and therefore will be subject
to greater credit risk than those debt
Certain of the ETFs invest in U.S. Treasury
obligations which are subject to numerous
risks including higher interest rates, economic
recession and deterioration of the bond
market or investors' perceptions thereof.
An investment in a portfolio containing smallcap
and mid-cap companies is subject to
additional risks, as the share prices of smallcap
companies and certain mid-cap
companies are often more volatile than those
of larger companies due to several factors,
including limited trading volumes, products,
financial resources, management inexperience
and less publicly available information.
Certain of the ETFs invest in high-yield
securities or "junk" bonds. Investing in highyield
securities should be viewed as
speculative and you should review your ability
to assume the risks associated with
investments which utilize such securities.
High-yield securities are subject to numerous
risks, including higher interest rates, economic
recession, deterioration of the junk bond
market, possible downgrades and defaults of
interest and/or principal. High-yield security
prices tend to fluctuate more than higher
rated securities and are affected by short-term
credit developments to a greater degree.
Certain of the securities in the portfolio are
issued by Real Estate Investment Trusts (REITs).
Companies involved in the real estate industry
are subject to changes in the real estate
market, vacancy rates and competition,
volatile interest rates and economic recession.
It is important to note that an investment can
be made in the underlying funds directly
rather than through the trust. These direct
investments can be made without paying the
trust's sales charge, operating expenses and
The value of the securities held by the trust
may be subject to steep declines or increased
volatility due to changes in performance or
perception of the issuers.
Although this unit investment trust terminates
in approximately 15 months, the strategy is
long-term. Investors should consider their
ability to pursue investing in successive
portfolios, if available. There may be tax
consequences unless units are purchased in an
IRA or other qualified plan.
For a discussion of additional risks of investing
in the trust see the "Risk Factors" section of the