60/40 Strategic Allocation Portfolio, 2nd Quarter 2017 Series
The 60/40 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.
Certain 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 floatingrate
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.
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 when due.
An investment in a portfolio containing small-cap and mid-cap companies is subject
to additional risks, as the share prices of small-cap 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 high-yield 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
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 organizational costs.
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 prospectus.