30% international securities in his portfolio could find that his targeted allocation to foreign investments has greatly increased or fallen within a few months. Yet there may be a strategic advantage to leaving a portfolio unbalanced if a specific region prospers or declines temporarily—in the way that some managers of Asian index funds deliberately assigned less weight to Japanese investments during the extended downturn of the Japanese economy during the 1990s. Such a strategy may allow investors to remain internationally invested while avoiding losses associated with a single struggling country. But close monitoring is necessary to ensure that potential gains outweigh the risks of an imbalanced asset allocation.

Indeed, a reasoned, analytical approach is key, not just in rebalancing but in global investing overall. By thinking of investments globally instead of as “us and them,” investors open themselves up to better opportunities for building and maintaining a diversified portfolio. Not only can such a portfolio deliver potentially higher returns from a wider variety of sources, it can also better withstand the gales that buffet the increasingly interconnected economies of the world.

This report has been issued and prepared by the Investment Management & Guidance and the Chief Investment Officer of the Private Banking and Investment Group and is not a publication of Merrill Lynch Research. This publication has been prepared for the use of Merrill Lynch clients not residing in the UK and may not be redistributed, retransmitted or disclosed, in whole or in part, or in any form or manner, without the express written consent of Merrill Lynch. Any unauthorized use or disclosure is prohibited. The information herein was obtained from various sources that we deem reliable, but we do not guarantee its accuracy.

This report provides general information only. Neither the information nor any views expressed constitutes an offer or an invitation to make an offer, to buy or sell any securities or other investment or any options, futures or derivatives related to such securities or investments. It is not intended to provide personal investment advice and it does not take into account the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. Investors should seek financial advice regarding the appropriateness of investing in any securities, other investment or investment strategies discussed in this report and should understand that statements regarding future prospects may not be realized. Investors should note that income from securities or other investments, if any, may fluctuate and that price or value of such securities and investments may rise or fall. Accordingly, investors may receive back less than originally invested. Past performance is not necessarily a guide to future performance. Any information relating to the tax status of financial instruments discussed herein is not intended to provide tax advice or to be used by anyone to provide tax advice. Investors are urged to seek tax advice based on their particular circumstances from an independent tax professional.

Asset allocation and diversification do not assure a profit or protect against a loss during declining markets. Some or all alternative investment programs may not be suitable for certain investors. Many alternative investment products, specifically private equity and most hedge funds, require purchasers to be “qualified purchasers” within the meaning of the federal securities laws (generally, individuals who own at least $5 million in “investments” and institutional investors who own at least $25 million in “investments,” as such term is defined in the federal securities laws). No assurance can be given that any alternative investment’s investment objectives will be achieved. In addition to certain general risks, each product will be subject to its own specific risks, including strategy and market risk.

Investments in foreign securities involve special risks, including foreign currency risk and the possibility of substantial volatility due to adverse political, economic or other developments. These risks are magnified for investments made in emerging markets. Foreign currency rates of exchange may adversely affect the value, price or income of any security or related investment mentioned in this report. In addition, investors in securities such as ADRs, whose values are influenced by the currency of the underlying security, effectively assume currency risk. Officers of Merrill Lynch or one or more of its affiliates may have a financial interest in securities of the issuer(s) or in related investments.

The market for municipal bonds may be less liquid than for taxable bonds. A portion of the income may be taxable. Some investors may be subject to Alternative Minimum Tax (AMT).

The Private Banking and Investment Group is a division of Merrill Lynch that offers a broad array of personalized wealth management products and services. Both brokerage and investment advisory services (including financial planning) are offered by the Group’s Private Wealth Advisors through Merrill Lynch, Pierce, Fenner & Smith Incorporated (MLPF&S), a registered broker-dealer and registered investment advisor. The nature and degree of advice and assistance provided, the fees charged and client rights and Merrill Lynch’s obligations will differ among these services. Investment products offered by MLPF&S are not insured by the FDIC and are not guaranteed by Merrill Lynch or any of its affiliates. The banking, credit and trust services sold by the Group’s Private Wealth Advisors are offered by licensed banks and trust companies, including Merrill Lynch Bank USA and Merrill Lynch Bank & Trust Co., FSB (Members FDIC), or their affiliates. Investments involve risk, including the possible loss of principal investment.