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ConcentrationThe journey from creating wealth to sustaining wealth

5CONC/09/05/EMEA/ENG

Concentration

ConcentrationThe journey from creating wealth to sustaining wealth

Contents

Summary 5

One way to amass wealth 6Build a company . . . or lead one

Concentration 8It’s no way to sustain wealth

Wealth allocation 12It begins and ends with what truly matters to you

How much to diversify? 16

You don’t have to sell your entire company 23

Patricia Stewart 29Author

Summary

As hard as it is to amass wealth, it is just as difficult to keep fortunes fromfloundering. JPMorgan Private Bank’s research demonstrates this.*

Concentration represents a particular quandary. It is the great creator ofwealth, propelling many a single-minded entrepreneur, from John D.Rockefeller to Google’s Larry Page and Sergey Brin, into stratosphericheights. But concentration can also be a merciless destroyer of wealth.

How then do we deal with the two faces of concentration? As advisorsto wealthy families for more than 160 years, we ask our clients to look atconcentration risk not as a mere asset allocation exercise, but to examineit within the context of what really matters to them.

For every client, there is a balance between the competing desires tocreate additional wealth, to preserve what exists and to fulfill personalneeds and interests. Different clients will put different weights on eachof these desires. And each client will vary these weights at differentwatersheds in his or her life. But find the right balance – and you willfind the greatest possibility for satisfaction with what your wealth canaccomplish and the level of risk you have to take.

Our strongly held view – that what drives you should drive yourasset allocation – forms the basis of this paper. First, we highlight thebenefits of concentration – and its risks. Then we introduce a usefulframework for thinking about wealth allocation. We move on to discussthe various forms of concentration and diversification to illustrate our point that concentration is not a black-and-white, all-or-nothingdecision. Finally, we outline the wide variety of solutions that exist.

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* By analyzing Forbes magazine’s original list of 400 wealthiest Americans and its most recent roll call,we learned that, firstly, only 50 names endured through the 22-year span. So America’s ultra rich havejust a 13% chance of remaining in that wealth club. And secondly, 205 names (51% of the list) droppedoff because of risks not managed. In particular, family after family suffered reversals due to highly concentrated positions in oil, real estate and single stocks.

One way to amass wealth Build a company… or lead one

Great fortunes have been created by visionaries who seize a unique opportunityand work single-mindedly to realize their dream.

Forbes magazine provides ample evidence of such achievements.According to its most recent survey of America’s wealthiest people, theentire top 10 of the Forbes 400 made it through concentration.

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Top 10 US billionaires

Forbes rank Individual/family Concentrated springboard

1 Bill Gates Microsoft

2 Warren Buffett Berkshire Hathaway

3 Paul Allen Microsoft

4-8 Walton Family Wal-Mart

9 Michael Dell Dell

10 Larry Ellison Oracle

On the international front, concentration is equally effective as anengine of wealth creation. Of the ‘Top 10 Global Billionaires’ identifiedby Forbes, half made their wealth outside the United States.

Successful executives of public companies have also been able to cre-ate wealth by concentrating their efforts and receiving a large percent-age of their compensation in company stock and stock options. Thethree highest-paid CEOs in the United States in 2004, says Forbes, accumulated $230 million each in total compensation on average overthe past five years.

If the potential rewards of concentration are so huge, why not sitback and grow rich that way?

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Among the top 10 global billionaires

Country Individual Concentratedspringboard

India /UK Lakshmi Mittal Steel

Mexico Carlos Slim Helu Telecom

Saudi Arabia Prince Alwaleed Bin BankingTalal Alsaud

Sweden/Switzerland Ingvar Kamprad Retail

Germany Karl Albrecht Retail

ConcentrationIt’s no way to sustain wealth

Concentration, we have seen, can propel you to vertiginous levels of wealth. Butcan concentration help you stay rich? Frankly, the odds are not in your favour.

Of 100 randomly selected companies, only 25% enjoyed a compoundreturn greater than the broad equity market over the past 15 years.And in that relatively short time period, about half the companiesexperienced a material change of control.

(Our random sample included 75 US public companies from theStandard & Poor’s Index of 500 US companies as of December 31,1989, and 25 UK and European public companies from the MSCIEurope index of the same date.)

Why did some companies lose steam or simply not survive? Oneanswer is event risk, the impact of the unforeseen.

This thesis is driven home in a study undertaken at JPMorganPrivate Bank. Analyzing the 500 companies embodied in Standardand Poor’s Index of 1990, Michael Cembalest, our Chief InvestmentOfficer, drew two key observations:

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. About one in five of the companies experienced a quarterly price decline of greater than 50%.

. More than three-quarters of this wealth destruction had to do with factors outside the control of company management.

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29 underperformed the market

25 outperformed the market

46 did not survive the period as the same company

If you had a concentrated position in any of our 100 randomcompanies, you had a one-in-four chance of staying rich.

Among the surprises and the surprised:

This event brought down…

Regulatory changes Beverly Enterprises

New product competition Campbell Soup

Drop in foreign demand Harnischfeger Industries Inc.

Sovereign risk Inco Ltd

Product obsolescence Ikon Office Solutions

Litigation Owens Corning

Structural market shifts Gillette

Accounting problems Goodyear Tire & Rubber Co.

Any asset can be exposed to event risk

Single real properties are vulnerable. Remember the saying about thethree most important factors of real estate? It turns out that “location,location, location” are also the largest risk in real estate investment.The value of a location can be materially affected by any number offactors – natural or man-made disasters, or changes in demographics,public policy or consumer preferences.

Experiences attesting to this abound. For example, in post-WorldWar II New York City, a successful businessman wanted to make asafe long-term investment. Trusting real estate as an asset class, hepurchased a building in what was then the robust heart of Manhattan,the corner of 42nd Street and Times Square. As the neighbourhoodslowly deteriorated over the next decades, the owner held on to hisinvestment, hoping for an eventual rebound. The turnaround didcome, but the owner enjoyed none of it. The City of New York, witha master plan to redevelop Times Square, legally took control of the properties in the area. The businessman ended up with only thepre-redevelopment market value.

Single hedge funds or investment boutiques are also exposed to event risk.The partners of the hedge fund, Long-Term Capital Management,attributed their failure to an unforeseeable event. But as RogerLowenstein said in his book about the rise and fall of Long-TermCapital: “People caught in such financial cataclysms typically feel singularly unlucky, but financial history is replete with instances of‘fat tails’ – unusual and extreme price swings that, based on a readingof previous prices, would have seemed implausible”.*

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* Roger Lowenstein, When Genius Failed: The Rise and Fall of Long-Term Capital Management,New York, Random House, 2000, pp 228-9.

The impact of the unforeseen, therefore, can be devastating. It is notmitigated by superior intelligence – after all, Long-Term Capital’spartners included two Nobel laureates.

The unforeseen is risky simply because it is unforeseen. Rare events dooccur; we just don’t know when or where. Families dependent on singlesources of wealth essentially have two ways to deal with the exposure:

. Reduce event risk through diversification.

. Or accept it, with one critical caveat: understand thoroughly the implications.

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The full measure of risk Risk and return are linked. Measuring return is pretty straightforward,but how should one measure risk? The popular approach is to measurethe variability of returns and describe them with a statistic called the “standard deviation”. While an investment’s standard deviation isa good representation of the normal volatility, it does not describeextreme events well. Unfortunately, extreme events do happen, moreoften than one would think. So we have developed a second measureto highlight event risk. We call this measure “Quarterly Events” orsimply the QE.

The QE focuses only on those events where the asset has lost morethan one third of its value measured over a three-month period. Howlikely is such an event? More than half the companies in our randomsample lost more than one third of their value in a three-month periodover the last 15 years!

Modern portfolio theory focuses on volatility risk (standard deviation)because it presumes that an investor diversifies away the event risk(QE). For example, the well-known Sharpe Ratio combines return andonly volatility risk. Since many of our clients choose not to diversifyaway the event risk, we believe it is important to factor into anystrategy both risk measures.

Wealth allocationIt begins and ends with what truly matters to you

Is concentration the source of great wealth creation or is it the single greatestrisk to large fortunes? There is no black-or-white answer. In fact, the questionmay well be a red herring.

The more fundamental issue, we believe, is identifying what is trulyimportant to you and your family. Your needs, your interests, your goalsand priorities should be the issues that drive the asset allocation decision.

Some families may find it difficult to articulate their priorities,never having stopped to deliberate on them for whatever reason. Butthe discipline of going through the steps outlined in this paper canbring clarity to ambiguous or conflicting family agendas, crystallisingthe context for asset allocation. In setting such decisions within theframework of life goals rather than just financial ones, you will be morelikely to find satisfaction with what you achieve with your wealth.

To facilitate the analysis, we often suggest that wealthy families thinkabout their goals in three categories. Each category leads to a specificinvestment approach along with a unique set of risks and potential returns.

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1 The wish to lead, manage or control – whether for personal satisfaction,professional gratification or to take advantage of special opportunities tocreate additional wealth:

2 The intention to partake of activities that depend on a long-termfunding from existing wealth:

3 Or activities that require significant current expenditures:

For many families, the categorisation of their goals will lead them tothink about organising their wealth into two significant pools of assets:

. Concentrated assets for creating wealth

. Diversified assets for sustaining wealth and for spending

For example. Running a company Concentrated . Managing real estate assets. Owning a business

For example. Foundation or charitable trust Diversified assets. Supporting your lifestyle including. Legacy for future generations liquid assets

For example. The construction of a Diversified

long-desired yacht assets. Or a new science building including

at your alma mater liquid assets

p

p

p

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As a family’s interests shift over time, so should the asset allocationbetween the creating wealth pool and the sustaining wealth pool.Shifting wealth from the asset that has created it to a diversified portfolioof risks and returns, we strongly believe, should be driven by whattruly matters to you.

How much wealth should be allocated to each pool? That dependson its relative importance to the family, a weighting that will changeat different junctures of the family’s life.

It’s not wrong to choose to remain concentrated. But it is vital tounderstand the implications. While the financial and psychologicalrewards of a concentrated asset can be immense, so too are the risks.

The next two steps in our asset allocation process are to decide how much wealth, if any, to shift between the creating wealth and

One family’s wealth cycle might evolve this way:

Creating wealth p Sustaining wealth

An entrepreneur creates a huge fortune by keeping a large percentage of his wealth in a single concentrated asset. All his eggsare in this one basket as he multiplies his wealth many times over.

Some years on, the entrepreneur finds less and less joy in work.Instead, he is enthralled by the dream of sailing around the world.His wife and children, who have never been too active in thebusiness, are increasingly committed to philanthropic work.

To make these pursuits possible, they carve out a second poolof wealth. This pool comprises a diversified portfolio of cash, bonds,stocks and alternative investments, the purpose of which is toprovide a sustainable source of funding over time.

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sustaining wealth pools and how best to do it. These are covered inthe following chapter.

Two journeys from creating wealth to sustaining wealth

An entrepreneur builds a successful company. This provides himwith his primary source of wealth. Cancer strikes and he undergoestreatment. Recovering, he reorders his priorities and decides todedicate himself to supporting medical research. He establishes a foundation, funding it with a majority of his company shares. Of this, 40% is privately placed with a friendly institution inexchange for cash. This partial private sale also permits some ofhis management team to gain some liquidity. He retires fromleading the company. Wealth shifts to the foundation and to anew sustaining wealth pool that will support his family’s needs.His children are encouraged to create their own wealth. And hehopes the family foundation will help keep the family together.

A South East Asian family turns its expertise in rubber to make afortune in its home country. As substantial wealth accumulates,the family increasingly worries about political instability. The familydecides to hedge its bets. Reducing its single-asset holding, itinvests in a series of concentrated private equity deals in the USin the rubber industry and, as a safety net, in a well-diversifiedportfolio. This is the family’s sustaining wealth pool, which will seethem through any turmoil such as a nationalisation of private assets.

How much to diversify?

Moving wealth from one pool to the other, however, is not an easy decision. Ourclients grapple with this transition in surprisingly similar ways.

“Ours is a stable business. Our management team is in control of our business. Nothing like a Merck, AIG or Shell could impact us.”

Unfortunately, bad things can happen to good companies and goodmanagement teams. No industry sector, asset class or economy isimmune to event risk. Of our random sample of companies, 60%experienced at least a one-third drop in value in a three-month periodduring the last 15 years.

“I am already diversified. I used to own a small, single-product company; now I own stock in a much larger, diversified company.”

While the more diversified businesses, public or private, represent lessrisk than single-focused entities, they are still significantly riskier

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than the market overall. US large company stocks with earnings frommore than one industry sector do show a decline in volatility risk.

But even the most diversified companies have significantly morevolatility than the overall market. For example, General Electric, oneof the most diversified companies, has a volatility of 21% comparedto the S&P500 of 15%.

Size matters too. Take grocery stores as an example. Albertson’s,with a recent market value of $9.3 billion, has a volatility less thanhalf that of Winn-Dixie, with its market value of $600 million (standarddeviation of 25% versus 65% respectively).

But diversification of business lines and size do not eliminate eventrisk. Management teams, in the name of diversification, may seek toexpand into unfamiliar businesses – only to destroy shareholder valuein the process. AT&T is just one of many recent examples. The dominantUS telephone company in the 1980s, AT&T was permitted to enternew, non-regulated businesses after spinning off its local telephone

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0%

5%

10%

15%

20%

25%

30%

35%

54321

Mea

n vo

latil

ity

Number of industries

Volatility decreases as exposure to industries increases

Source: JPMorgan Private Bank Advice Lab analysis of S&P500 using BARRA Past performance is no guarantee of future results

operating companies. It chose to compete in the computer business –first through internal initiatives, then by buying NCR Corporation.But within five years, AT&T had to admit defeat and give up on itsmoney-losing computer business.

Even if the management team stays focused on what it knows best,the company may grow to a size where event risk will naturallyincrease. When a firm employs hundreds of thousands of employees,maintains operations in multiple countries, offers hundreds of productsor services, it perforce increases the possibility that someone or somethingmay go wrong somewhere. Take the cautionary tale of Barings. Amaverick trader, operating half a world away from the London head-quarters, generated such a tsunami of losses that he singlehandedlyended one of England’s oldest and most prestigious merchant banks.

“We have spread our investments across a variety of companies, but have stayed within the asset class or local market we know best.”

Diversification within a sector is good, but, as discussed above, no sectorhas been immune to event risk. It is critical to spread risk across assetswith patterns of risks and returns that are as dissimilar as possible. Bydoing so, you can actually improve the overall risk-adjusted return ofyour wealth. The professionals refer to this as finding assets with lowcorrelations. The layman might say: Do not put all your eggs in onebasket – whether that basket represents a management team, realestate property or industry sector.

To many, investing in unfamiliar assets will seem to increase risk,not reduce it. This bias in risk perception is borne out by studies in thefield of behavioural finance: The known generally strikes people as lessrisky. But, in reality, the familiar is no less risky than the foreign.*

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* An extensive discussion of the applicability of behavioral finance to sustaining wealth can be foundin Beating the Odds, Challenges of Wealth series, JPMorgan Private Bank, 2004.

To overcome this all-too-human slant, we must work harder to learnabout other investment opportunities. If we broaden our investmenthorizons, we might be able to lower the overall risks we take toachieve a certain level of return.

The following illustration highlights the value of diversification ifthe assets are not correlated with each other.

“Our portfolio is diversified. While five stocks represent the majorityof our wealth, they are in different sectors.”

Five different stocks are better than one, but not nearly as good as 30 or50 or 500. As the table in the next page shows, the higher the number ofdiversified stocks – whether US or European – the lower the volatility.

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6.0%

6.5%

7.0%

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100% Investment A 100% Investment B 50% A and 50% B

Correlation

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Increased return resulting from lower correlation

The lower the correlation, the higher the return

Past performance is no guarantee of future results

“As a private company, we just don’t have the degree of risk that similar public companies do.”

What matters is one’s definition of risk. Publicly traded stocks havesome degree of linkage with each other and a company-specific eventsometimes affects stocks in the same industry or market for no apparentreason. On the other hand, private companies have less access to thecapital markets and bank lending, thus limiting their ability to grow– which is a risk of another kind.

If risk is defined either as volatility or event risk – as we are doingin this paper – then public and private companies of a similar size,capital structure and business mix will be subject to the same risk.The fact that private companies have less frequent valuations does notchange their risk. Risks unmeasured still remain risks. One cannot,unfortunately, simply eliminate risk by not measuring it.

“Remaining in control of my company seems less risky than selling out and hiring money managers I don’t know to invest in stocksI don’t know.”

Selecting investment professionals does introduce a risk, but it is onethat can be managed. Some approaches might be to use more than onemanager, apply a disciplined due-diligence process in selecting managersfor each asset class, and index where appropriate.

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US or European stock Standard deviation

One average large company stock 30%

Five randomly chosen, 24%equally weighted stock portfolio

Broad equity index 14%

“Why should I sell now? Analysts have a ‘buy’ recommendation on my stock.”

Analysts make their recommendations in the context of a diversifiedportfolio, often in relation to whether the position should have aslight over- or underweight compared to its percentage weight in theindex. Their published recommendations are never intended for positionsthat have a weight of 10% or more of a particular portfolio.

“If I sell the concentrated position and pay the tax, I’m not sure that the sales proceeds can be invested in anything that will outperform my concentrated stock sufficiently to earn back the tax within a reasonable time.”

If your time horizon is longer than seven years, the odds favour diver-sifying today, assuming a typical stock. While the Morgan AssetProjection System (MAPS)* is based on a stock with the same expectedreturn as the market (8.6%) and a volatility risk or standard deviation of30% compared to the market’s 15%, the analytical tool can run scenariosfor any concentrated investment.

In the illustration from MAPS (see overleaf), we graphed the lower halfof the distribution of likely outcomes. The top number on each bar isthe median value, that is, it is equally likely that the value of the port-folio will be above this figure as below it. The number at the bottom ofeach bar is the fifth percentile – there is approximately a 5% chance thatthe future market value would be below this number.

Note that at the end of each period – five, seven, eight or 10 years intothe future – the size of the grey columns is smaller than the green ones.

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* Advice Lab analysis using the Morgan Asset Projection System (patent pending). Analysis assumessingle stock held at a zero tax cost basis and a 15% long-term capital gains tax subtracted prior to thereinvestment of proceeds in a diversified US large cap equity portfolio.

Also, note that the number at the bottom of each grey bar is higher thanthe green one. In other words, risk has been reduced through diversi-fication. But what about likely returns? The median of the grey columnsrises above that of the green between year 7 and 8, indicating that fromyear 8 onward, there is a higher likelihood that the diversified portfoliowill have a greater value than the single stock.

The critical key to success is that the family clearly defines its currentgoals, interests and passions – and let these drive the mix betweenhow much wealth continues to be in the concentrated asset and howmuch should be invested in diversified risks and returns.

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0

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Year 10 Year 8 Year 7 Year 5

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71.8

115.7

39.5

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74.0

129.1

37.6

134.5

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78.5

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Typical single-stock holding Portfolio resulting from sale of the single stock holding and after-tax proceeds

Port

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Diversification benefits can outweigh tax cost over time

Past performance is no guarantee of future results

First, we re-emphasize that asset allocation should be the result of what keepsyou excited and engaged.

If running your company gives meaning to your life and you have noother needs or obligations, why diversify? If, however, you are at thepoint where your interests or your family’s interests have morphed,then your asset allocation should be adjusted to reflect new priorities.Concentration and diversification are measured in degrees, not absolutes.

How much wealth to shift?Consider your needs and goals – and how they interact with yourcompany or other core asset.

How much control of your company do you want to retain?Is keeping complete ownership of the company paramount? Or is itsufficient to maintain the minimum ownership that ensures votingcontrol? Do you want partners for their experience, their network or

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You don’t have to sell your entire company

simply their ability to share the risk? Will you be able to accept theidea of outsiders questioning your decisions? Do you feel the familyname must remain on the front door or would the family’s identity bebetter served through philanthropic recognition?

Your spending needs, now and for future generationsOur analysis indicates that if you withdraw 3% of principal for taxesand spending each year, you have a greater than 75% probability ofbeing able to sustain your wealth indefinitely.* To estimate the minimumsize of the sustaining wealth pool, start by determining your spendingneeds and how likely you want it to be sustainable.

Family dynamicsAccording to our research, families that have successfully sustainedwealth across multiple generations share certain best practices.**Effective families, for example, cultivate entrepreneurial strengths, helpmembers develop competencies and provide independence, includingexit options. To implement these practices, some degree of liquidityof the family’s wealth will be required.

Feeding a new passionInterests change over time. A successful hedge fund manager may nowbe captivated by art collecting. An entrepreneur may want to throwhis weight behind containing nuclear proliferation. An executive whosecancer is in remission may wish to fund a research centre in his home-town. Some interests could require a significant allocation of wealth.

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* See The spending rate matters more than asset allocation, Challenges of Wealth series, JPMorgan Private Bank, 2002.** See The eight proactive practices of successful families, Challenges of Wealth series,JPMorgan Private Bank, 2003.

LiquidityYou may want to have the liquidity to be able to take advantage of thenext opportunity when it presents itself.

When to diversify?Timing may be influenced by a number of factors. Are you having toomuch fun leading the company to reduce your stake now? Are marketconditions specific to your stock or sector at this time particularlyunfavourable (why sell at the bottom?) or booming (why sell when rosyprospects could become even rosier?). Do you anticipate a new productunder development to raise the valuation of your company? Or coulda likely regulatory change significantly lower it? How quickly do youneed liquidity to add to the sustaining wealth pool in order to meetyour other needs and interests?

The best strategy may be to refrain from acting immediately, but todetermine what might trigger future action. For example, you mightwant to fix a threshold valuation number: When a specific price isreached, you will shift some of your wealth. This can take the form ofa simple note to yourself with the price target, locked away in a deskdrawer. It can also be a formalised sales contract where you commit toa sale at your price target. Taking these steps will make it less likelythat you will fall into the all-too-common trap of reaching for moreand resetting the price target each time it is met.

What techniques to use?The techniques available depend on the nature of the asset, applicableregulations and policies, and current market dynamics. While sometechniques can be bewilderingly complex, it is important that youunderstand what you are giving up, when you are giving it up, what valueyou will receive and with what certainty you will receive this value.

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For each solution you consider, ask yourself:. To whom am I transferring some or all of my ownership? (Is it to a

partner, family member, the market, trustee, foundation, etc.?) Arethe new owners limited in what they can do? What is the nature ofthese limitations and how long do they last?

. What am I selling or transferring: a share in the earnings, votingrights or both?

. Am I retaining any asset (patents, trade names, office space, etc.)?

. Am I retaining any obligations (product liability, not to compete,accounting accuracy, etc.)?

. When does it really happen – now or sometime in the future? Howcertain is it to happen? If there is optionality, that is, the right butnot the obligation to transfer or sell – who controls the option andunder what circumstances?

. Is the minimum and maximum price set or uncertain? (Note that if the price is set in terms of number of shares of another stock, thenthere is a shift in concentration risk, from exposure to your stock tothat of the acquirer’s.)

. Do all parties agree on how the transaction will be handled fromtax, regulatory and public relations standpoints? For example, if there is uncertainty about the tax treatment, it is best for all partiesto agree at the outset on a common filing position with the local tax authorities.

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Specific solutions vary greatly. Some to consider:

For private, family businesses Rather than a complete sale or going public, you might:

. Bring in a private equity partner.

. Sell a portion of the company to your employees.

For large real estate propertiesThink about selling to a fund in exchange for a combination of cashand an equity interest in the fund. This may provide diversification ofsingle property risk while still retaining risk and return exposure toreal estate as an asset class.*

For senior executives in the process of leaving public companies Review all the risk exposures and prioritize which to focus on andwhen. For example:

. Are you planning to take a lump-sum distribution from your pension plan? Will you be exposed to a rise in interest rates betweennow and when the present value is calculated? If so, you might wantto hedge the interest rate exposure.

. Are you planning to postpone the receipt of the proceeds from yourdeferred compensation and is it subject to credit risk? If so, considera credit default swap after you leave the company.

. Do you want to start to reduce your equity exposure but don’t know which of many tranches of stock and options you should sell

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* See On My Mind, JPMorgan Private Bank, Fall/Winter 2004.

or exercise first? (At JPMorgan Private Bank, we use a proprietary tool to calculate in a portfolio context the optimal sequence fordiversifying stock and executing stock option positions.)

For owners of public companiesConsider a combination of solutions. Many families have found it best to start a programme of consistent sales of a small position intothe market, coupled with hedging a part of their holdings and trans-ferring some from time to time to family members, employees, pri-vate or public foundations.

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Points to rememberFor every family, there is a ‘right’ balance between its risk/returnexposure to a specific asset for wealth creation on the one hand, andits allocation to a diversified pool of risks and returns on the other.What the family wishes to achieve going forward is what determinesthis balance. In deciding your own balance – your wealth allocation –consider these steps:

. Understand your family’s needs and interests.

. Let the above lead to an estimate of how much to allocate betweena concentrated risk/return pool and one that is focused on diversifiedrisks and returns.

. Then set a strategy as to how much wealth to shift, if any, and when.

. Finally, explore all the techniques available to help implement the strategy and execute the best combination of techniques.

This way, you will have a greater likelihood of being happy with whatyour wealth accomplishes for you.

Patricia Stewart is JPMorgan Private Bank’s guru in analyzing complexwealth situations and developing asset allocation strategies. She focuseson helping families and chief executive officers address their concentratedpositions, creating for them a framework that sustains their ability tomeet their goals.

Trisha has been immersed in this field since 1992, when she joined thePrivate Bank to develop and manage strategies that individuals coulduse to diversify concentrated holdings. As a founding member of thePrivate Bank’s Advice Lab – a thinktank for wealth management issuesaffecting our clients – she has played a key role in building our pro-prietary analytics and modelling tools.

Joining JPMorgan in 1977, Trisha managed private and publicMiddle Eastern wealth for two years before moving on to corporatefinance. From New York and London bases, she helped global corpo-rations and government entities with their capital markets needs andtransactions. Prior to her Morgan career, she worked in the US Houseof Representatives in Washington, D.C. A graduate of Smith College,Trisha lives in New York City with her husband and daughter.

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Patricia StewartAuthor

Other ContributorsJack Caffrey Simran KaurMichael Cembalest Paul McKeaveneyLaura Drachman Peter MillerTim Foley Lance SchiffTim Harris Ann Semmer

Editors notePreviously published in The Challenges of Wealth series:

Beating the odds: Improving the 15% probability of staying wealthyWealth preservation: The spending rate matters more than asset allocationEffective governance: The eight proactive practices of successful families

For a copy, please contact your banker or usual JPMorgan contact.

jpmorgan.com/privatebank

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Please keep in mind

This material is intended to inform you of products and services offered by JPMorgan Private Bank.“JPMorgan Private Bank” is the marketing name for the private banking activities of JPMorgan Chase & Co.and its subsidiaries worldwide. JPMorgan Chase Bank, N.A. and J.P. Morgan Trust Company, N.A. aremembers of the FDIC. J.P. Morgan Securities Inc. (JPMSI) is a member of the New York Stock Exchange(NYSE) and other national and regional exchanges. JPMSI is a broker-dealer with the NASD and is amember of SIPC. This material is approved for issue in the U.K. by J.P. Morgan International BankLimited, authorized and regulated by the Financial Services Authority. JPMorgan Chase Bank, N.A. isregulated in France by the French banking authorities (Comité des Établissements de Crédit et desEntreprises d'Investissement (CECEI), Commission Bancaire (CB) and Autorité des Marchés Financiers(AMF)). J.P. Morgan (Suisse) SA is regulated in Switzerland by the Federal Banking Commission (FBC).This material is distributed in Hong Kong by JPMorgan Chase Bank, N.A., Hong Kong branch whichis regulated by the Hong Kong Monetary Authority as an authorized institution. This material is distributedin Singapore by JPMorgan Chase Bank, N.A., Singapore branch which is regulated by the MonetaryAuthority of Singapore. In addition, JPMorgan Chase & Co. may operate various other broker-dealers(together with JPMSI [“the broker-dealer”]) or investment advisory entities.

This material is not intended as an offer or commitment to lend or otherwise extend credit. Any termsset out in these materials are indicative only and for discussion purposes only.

This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument.Any of the broker-dealers may hold a position or act as market maker in the financial instruments of anyissuer discussed herein or act as an underwriter, placement agent, advisor or lender to such issuer.

We believe the information contained in this material to be reliable but do not warrant its accuracyor completeness. The opinions, estimates, and investment strategies and views expressed in this documentconstitute the judgment of our investment strategists dedicated to private clients, based on current marketconditions and are subject to change without notice. The investment strategies and views stated here maydiffer from those expressed for other purposes or in other contexts by other JPMorgan market strategists.Past performance is not indicative of comparable future results. The investments discussed may fluctuatein price or value. Investors may get back less than they invested. Changes in rates of exchange may have anadverse effect on the value of investments.

If reference is made to a product or service offered by the broker-dealers, the obligations and the securitiessold, offered or recommended are not deposits and are not insured by the FDIC, the Federal ReserveBoard or any other governmental agency. The broker-dealers are not banks and are separate legal entitiesfrom their bank affiliates. The obligations of the broker-dealers are not obligations of their bank or thriftaffiliates (unless explicitly stated otherwise), and these affiliates are not responsible for securities sold,offered or recommended by the broker-dealers. The foregoing also applies to our other non-bank, non-thriftaffiliates. FDIC insurance and domestic deposit preference are not applicable to deposits or other obligationsof our bank branches or banking affiliates outside the United States.

The views and strategies described herein may not be suitable for all investors. This material is distributedwith the understanding that it is not rendering accounting, legal or tax advice. Please consult your legalor tax advisor concerning such matters.

Additional information is available upon request.© 2005 J.P. Morgan Chase & Co.

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