Making the Grade: Test Your Knowledge of Key College Planning Facts

The latest report on college costs published by the College Board brought some good news: The increases in tuition and fees for the 2014-2015 academic year were lower than the average annual increases in the past 30 years across all sectors included in the study.

Yet even though college price increases are not accelerating, the report’s authors affirmed that, in real terms, college costs have been rising for decades. For instance, the report, “Trends in College Pricing 2014,” revealed that the inflation-adjusted average published price for in-state students at public four-year universities is 42% higher than it was 10 years ago and more than twice as high as it was 20 years ago. In the private nonprofit four-year sector, the increases were 24% over 10 years and 66% over 20 years.

Given this reality, it is easy to see why devising a plan to pay for college is a major stressor for many American families. Underlying that anxiety are numerous misconceptions about the financial aid process and how a family’s savings might affect a student’s eligibility to receive aid.

Further, there also seems to be a general lack of knowledge about college savings vehicles, specifically 529 college savings plans – how they work, and the many benefits they have to offer families struggling to juggle multiple financial goals.1

529 plans have altered education planning in much the same way that the 401(k) altered retirement planning. A unique combination of features – high contribution limits, professional asset management, account holder control of assets, flexibility in transferring the money, and perhaps most important, generous tax advantages – have solidified the 529 plan’s position as a leader in the education planning world.

Test Your Knowledge

Here’s your chance to test your knowledge about college planning and 529 plans. We hope that the information shared here will shed new light on some of the details of the process.

1. What form do all colleges require of students applying for financial aid?
_____ CSS Financial Aid PROFILE
_____ FAFSA
_____ EFC

Answer: FAFSA. Any college or university that awards federal student aid requires the Free Application for Federal Student Aid (FAFSA). For the majority of colleges this is the only aid application required. The CSS Financial Aid PROFILE is required by some private colleges for assessing eligibility for the specific college’s institutional aid dollars. The Expected Family Contribution (EFC) is a number calculated by the financial aid forms.

2. Saving for college in a 529 college savings plan negatively impacts eligibility for financial aid.
_____ True
_____ Maybe, but often the effect is minimal in the financial needs-analysis process
_____ False

Answer: Maybe, but often not enough to worry about. The value of a 529 savings plan account set up by a parent or legal guardian is reported as a parental asset on the FAFSA and only increases the EFC by a maximum of 5.64% of the total account value. 529 plans and Coverdell Education Savings Accounts tend to be two of the better options for saving for college without jeopardizing financial aid. Income is generally more of a determinant of need-based financial aid eligibility or lack thereof.

3. Assets held in a 529 college savings plan can be used to pay for what type of school?
_____ Four-year college or university
_____ Two-year community college
_____ Qualified trade school
_____ All of the above
Answer: All of the above. With a 529 savings program, you can use your account at any accredited college or university in the country (and some outside of the country).

4. What happens to the 529 college savings funds if the student does not go to college?
_____ The money can be used by another family member to pay for qualified expenses
_____ The federal government will seize the account
_____ Nothing
_____ The plan will be declared void, and the money returned to the plan owner

Answer: You may generally change the beneficiary. That money can be used by a sibling, cousin, or other family member for qualified higher education expenses, without penalty.

5. 529 assets held in the grandparent’s name are shielded from the needs-analysis process.
_____ True
_____ False
Answer: True. Assets saved in the name of a grandparent are not reported on the FAFSA and do not typically count toward the EFC.

Caution: Distributions from a grandparent-owned 529 plan used to pay for a student’s college expenses generally weigh heavily in the federal needs-analysis process and are typically counted as student income on the following year’s FAFSA form, with an assessment rate of 50%.2

6. 529 plan distributions from a parent-owned 529 account do not increase the family’s EFC.
_____ True
_____ False

Answer: True. Unlike distributions from a grandparent-owned account, distributions from a parent-owned 529 plan that are used to pay for a dependent student’s college expenses are not reported on the FAFSA and do not typically count as income in the federal needs-analysis process.2

7. What is assessed most heavily in the federal financial aid formula for dependent students?
_____ Student’s income
_____ Parent’s income
_____ Student’s assets
_____ Parent’s assets

Answer: Student’s income is generally assessed at the highest rate. The federal formula considers up to 50% of a dependent student’s income as being available to pay for college. Here are the approximate rates for the primary financial resource categories that are assessed in computing an EFC:

• Student’s income Up to 50%
• Parent’s income 22% to 47%
• Student’s assets 20%
• Parent’s assets 2.6% to 5.64%

8. Federal loans tend to be the most common type of financial aid used for the education of dependent undergraduates.

_____ True
_____ False

Answer: True. For many families, the lion’s share of financial aid is in the form of federal loans often supplemented by private loans, particularly when incomes are above a certain level and many need-based grants have been ruled out.

Important caveat: If you combine all grant/scholarship aid dollars from all sources for all undergraduates, the amount would exceed the total federal loan dollars. Federal loans constituted 34% of total undergraduate student aid in 2013-14, according to the College Board.

How did you do? Hopefully this information has helped you to better understand the financial aspects of college planning – in particular the powerful but somewhat complex 529 college savings plan. To learn more about 529 plans and selecting the right plan for your situation, contact a qualified financial advisor.

For more on the financial aid process, the following organizations offer ample, free information:
• The College Board: Call your regional office or visit collegeboard.org
• FinAid: Visit http://www.finaid.org
• U.S. Department of Education, Federal Student Aid Information Center: Call (800) 433-3243 or visit www.fafsa.ed.gov

Source/Disclaimer:
1 Investing in 529 plans involves risk, including loss of principal. Before you invest in a 529 plan, request the plan’s official statement and read it carefully. The official statement contains more complete information, including investment objectives, charges, expenses, and the risks of investing in a 529 plan, which you should carefully consider before investing. You should also consider whether your home state or your beneficiary’s home state offers any state tax or other benefits that are only available for investments in such state’s 529 plan. Section 529 plans are not guaranteed by any state or federal agency. By investing in a 529 plan outside of the state in which you pay taxes, you may lose the tax benefits offered by that state’s plan. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary.

2 Note that some private colleges may treat the needs-analysis process a little differently from what is reported here, and generally the comments in this document apply to the federal needs-analysis process. Individual situations will vary.

Sources:
The College Board, “Trends in College Pricing 2014,” November 13, 2014.
Wealth Management Systems Inc., “Increasing 529 Sales & Savings Rates: The Role of Personalized Planning Tools and Education: Part 2,” June 2015.
The College Board, “Trends in Student Aid 2014,” November 13, 2014.
Forbes, “How Much Do You Know About a 529 Savings Plan? [Quiz],” June 23, 2015.

Provided by the Financial Planning Association
Because of the possibility of human or mechanical error by Wealth Management Systems Inc. or its sources, neither Wealth Management Systems Inc. nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall Wealth Management Systems Inc. be liable for any indirect, special or consequential damages in connection with subscriber’s or others’ use of the content.
© 2015 Wealth Management Systems Inc. All rights reserved.

Mortgage Debt: Friend or Foe?

The disadvantages of paying off your mortgage, if any, may stem from the financial trade-offs that a mortgage holder needs to make when paying off the mortgage. Paying it off typically requires a cash outlay equal to the amount of the principal. If the principal is sizable, this payment could potentially jeopardize a middle-income family’s ability to save for retirement, invest for college, maintain an emergency fund, and take care of other financial needs.

If you have the financial means to pay off a mortgage, consider the following:

Your feelings about debt – Some homeowners like the feeling of security that comes with owning a home free and clear. If this describes you, it may be to your benefit to pay off or reduce the size of your mortgage. Should conditions in your local real estate market decline, there’s less of a chance of owing more than you own.

Your timeline until retirement – If your mortgage is relatively small, you may be able to invest the money formerly used for mortgage payments for retirement or other long-term goals. Your timeline until retirement may be a factor when making this decision. With 10 years or more remaining until you expect to retire, you could have time to build a nest egg if you invest the money formerly used to pay a mortgage. If you plan to retire sooner, entering retirement without a mortgage could provide you with more flexibility during your later years.

Your tax savings – Mortgage interest typically is tax deductible. During the early years of a mortgage, when the interest payments are highest, many homeowners benefit from a sizable deduction. This could be important if you are in a higher tax bracket. If your interest payments are relatively low, the tax savings could be less of a factor.
Your future plans – Owning a home outright could be an advantage if you plan to sell it during the next few years. You could potentially leave your existing residence with more home equity.

Your overall debt load – If you are carrying other forms of debt, such as credit card balances or a college loan, consider whether you could benefit from paying off other debt first before reducing or eliminating your mortgage.
There is no “right” answer for everyone when it comes to potentially paying off a mortgage. Consider your feelings about debt, your timeline with respect to long-term goals, your tax savings, and other factors before making a decision that is in your best interest.

After-Tax Value of Home Mortgage Deduction

One of the big benefits of home ownership is the mortgage interest deduction. The federal government lets you deduct mortgage interest on a first or second home, up to $1 million per year.

For a $200,000 mortgage, at 5%, the after tax savings can start at $125/month for someone in the 15% tax bracket and $209 in the 25% marginal tax bracket.

Source/Disclaimer:
Source: Wealth Management Systems Inc. Monthly payments assume a conventional 30-year fixed-rate mortgage at 5% APR, excluding escrows for taxes, insurance, or other fees. Mortgage deductions are based on first month’s interest. Assumes that other deductions exceed the standard deduction. (CS0000218)

Used with permission from the Financial Planning Association
Because of the possibility of human or mechanical error by Wealth Management Systems Inc. or its sources, neither Wealth Management Systems Inc. nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall Wealth Management Systems Inc. be liable for any indirect, special or consequential damages in connection with subscriber’s or others’ use of the content.
© 2015 Wealth Management Systems Inc. All rights reserved.

It’s Tax Time: Tips for Getting Organized

Ask many Americans about their experience with tax time and they are likely to describe lots of paperwork, confusing rules, and late nights on their computer. But it doesn’t have to be that way. Getting organized now – instead of waiting until the days before April 15 – may help streamline your tax preparation and help you identify deductions that you might otherwise overlook in the last-minute rush.
You’ll need the right paperwork to get started (see table below), but you may want to consult a tax advisor to determine whether you need to consider additional factors that are unique to your situation.

Tax Preparation Documents

Document Why You Need It

Form W-2 from your employer The starting point for determining your taxable income.

Form 1099 and other statements from investment firms Helps you compute capital gains, which are taxable, or capital losses, which you may be able to deduct. Dividends and interest are taxable at ordinary income tax rates. Contributions to a traditional IRA may be tax deductible if you meet income thresholds established by the IRS.
Real estate records You may be able to deduct mortgage interest and real estate taxes. Expenses associated with investment real estate may be deductible. If you sell real estate at a profit, you may be required to pay taxes on a portion of the gain.

After you have accounted for the most common aspects of tax preparation, dig a little deeper to discover other areas of your life that may offer tax breaks.

Parenthood

Children are not just a blessing to your family. They also bring with them a host of potential tax breaks.

• Dependency exemption. For the 2014 tax year you can deduct $3,950 for each qualifying child you claim as a dependent on your tax form. If your adjusted gross income is above a certain level, you may not receive the full exemption amount.

• Child Tax Credit. This credit can be worth as much as $1,000 per child under the age of 17 that you claimed as a dependent on your tax return. For 2014, the amount of the credit begins to phase out for joint filers with adjusted gross incomes that exceed $110,000 and for single filers and heads-of-household whose income exceeds $75,000.

• Child Care Credit. If you paid childcare for a dependent child under age 13 so you could work, you can earn a credit of between $600 and $1,050 in 2014. If you are paying for the care of two or more children, the potential credit you can earn increases to between $1,200 and $2,100. As with most other tax breaks, the size of the credit depends on your income and, in the case of this particular credit, how much you pay for care. (You can count up to $3,000 for the care of one child and up to $6,000 for the care of two or more).1

• Adoption credit. If you adopted a child in 2014, you can claim a credit of up to $13,190 help offset the cost. Income phase-outs apply for adjusted gross incomes that range from $197,880 to $237,880.1

Lesser-Known Deductions

You may be able to benefit from either a tax deduction or a tax credit if you had any of these types of expenses during 2014.

• Purchased an electric car or plug-in hybrid.
• Had student loan debt paid by parents.
• Had out-of-pocket expenses related to a job search.
• Had moving expenses associated with a first job.
• Were self-employed and paid Medicare premiums.
• Had jury duty pay that was surrendered to employer.
• Utilized the American Opportunity Credit and/or other government-sponsored education programs to pay for education expenses.
• Made energy-saving home improvements.

These are just a few of the tax savings that may await you come April 15. Of course, your individual circumstances will determine if you are eligible for these and other tax breaks. Your tax professional should be able to provide more information on what you do and don’t qualify for.

This communication is not intended to be tax advice and should not be treated as such. Each individual’s situation is different. You should contact your tax professional to discuss your personal situation.

Source/Disclaimer:
1Source: TurboTax, “Birth of a Child,” updated for tax year 2014.

Because of the possibility of human or mechanical error by Wealth Management Systems Inc. or its sources, neither Wealth Management Systems Inc. nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall Wealth Management Systems Inc. be liable for any indirect, special or consequential damages in connection with subscriber’s or others’ use of the content.
© 2015 Wealth Management Systems Inc. All rights reserved.

Two Bills That May Affect You or Someone You Know

Congress has passed two bills that are expected to be signed by the President into law.
The first is the Achieving a Better Life Experience Act or ABLE. This act is to help those with disabilities and their caregivers to save and provide for education, housing and medical expenses in the future.

“In short, the ABLE Act lets those with disabilities set up tax-free savings accounts to help them manage the costs of medical care, housing, transportation and continued education,” said House Ways and Means Committee chairman Dave Camp, R-Mich., in a statement. “This will allow those who are on Medicaid and SSI to work, earn, and save more while still receiving those important benefits. It is important to note that these savings accounts will be available to all individuals with disabilities and their caretakers, not just those on Medicaid or SSI.”

Some of the details of that act are for children and adults whose disability occurred before age 26 and who meet the SSI program’s disability standard would be eligible to open one ABLE account in their state of residence.

Anybody would be allowed to open and contribute to an ABLE account on behalf of the eligible beneficiary, but each beneficiary is restricted to one ABLE account. These would be called a 529A account under the same IRS code of college savings plans. Similar to 529 plans except there is no state tax deduction, the account would just grow tax free, like a Roth IRA.

The contributions are still limited and contributions from family members and friends are restricted to the annual gift tax exemption, which is $14,000 in 2014.

Account funds could be used to pay for a broad range of eligible expenses, including for education, housing, transportation, health, and other items as established by the Secretary of the Treasury in regulation.

The second bill is the extension of some tax extensions that expired in 2013. This includes the home mortgage deduction, deduction for qualified tuition and expenses, school teacher expense deductions and some energy credits.

Individual tax rates will remain the same. For more details on these bills, check out Passage of tax extenders.

Do I Need Travel Insurance?

Whether you need travel insurance is likely to depend on your level of coverage from existing homeowner’s, medical, automobile, and life insurance policies. In many instances, travel insurance may duplicate coverage that you already have.

Travel insurance is likely to include coverage for trip cancellation, lost or stolen baggage or personal items, emergency medical assistance, and death while you are on vacation. Trip cancellation provides coverage if a cruise line or tour operator goes out of business or if you need to cancel because of illness or a death in the family. Costs for trip cancellation coverage typically range between 5% and 7% of the cost of the vacation.1

Research Before You Buy

Before purchasing coverage for baggage or personal effects, determine how much coverage an airline or other travel provider offers. Airlines may limit their liability for lost baggage. Also review your health insurance to determine your liability for medical expenses, especially emergency care, out of state or out of the country, if applicable. If you already have life insurance, you may not need additional coverage for vacation.

If you determine that your existing coverage will not be adequate for your personal liability during a vacation, you may want to purchase coverage through a third-party insurance company rather than from a tour operator or cruise line. In the event of bankruptcy, a policy originating from a tour operator or cruise line may not provide coverage.

_Source/Disclaimer:
1Source: Insurance Information Institute.

Because of the possibility of human or mechanical error by Wealth Management Systems Inc. or its sources, neither Wealth Management Systems Inc. nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall Wealth Management Systems Inc. be liable for any indirect, special or consequential damages in connection with subscriber’s or others’ use of the content.
© 2014 Wealth Management Systems Inc. All rights reserved_

Three Simple Steps to Impact Investing

What is impact investing? Think of it as “Values Investing” or “Socially Responsible investing”. Or when it comes down to it, investing in companies that think as you do.

1. First, define what you mean by impact investing, what does it mean to you? Are you concerned about social issues, environmental or religious issues? Are you interested in medical or pharmaceutical companies? Do you support firearms? No matter what your interests are, there are stocks or mutual funds to fit your values.

2. Second, find an advisor that will listen to what interests you. If the first words out of their mouths are, “You can’t make money doing that!” Find someone who says, “I think we can find something to align with your values.” There are plenty of choices, and they are getting better all the time. Costs have come down and many are actively participating in the companies they hold as activist shareholders.

3. Third, after defining what you mean and finding the right advisor then start paying attention to the annual shareholder materials and proxy voting. The more active you are in learning about the funds you hold the more aware you can be about what you are supporting. Too many people invest in a fund thinking it is socially responsible, only to find out later it wasn’t what they thought it to be. An educated and open-minded advisor can help you before you invest.

Nothing is perfect, but you can feel good about the choices you are making and still invest wisely. It takes a little time and devotion but can be rewarding as well.

Four Tips for Tax-Savvy Investors

A century ago, author Mark Twain wrote that the difference between a taxidermist and a tax collector is that the taxidermist only takes your skin. Today, the IRS isn’t any more popular. Why not see if any of the following strategies could allow you to keep more of what your investments earn?

1. Look into tax-managed mutual funds. Portfolio managers of tax-managed funds can use a number of strategies to help reduce the tax bite shareholders suffer. For example, they may strive to keep portfolio turnover low to help minimize taxable gains, or they may actively use losses to offset taxable gains.

2. Consider municipal bonds and bond funds. Because the interest on a municipal bond is usually exempt from federal taxes, and sometimes state and local taxes, it may actually produce a better yield than a taxable bond with a comparable interest rate. The higher your income tax bracket, the more you may benefit from owning “munis.”1

3. Contribute to tax-advantaged retirement vehicles. You can now contribute up to $5,500 annually to an IRA plus an additional $1,000 per year if you’re over age 50 (for the 2014 tax year). Traditional IRAs offer tax deferral – you pay no taxes on earnings until withdrawal – and may provide tax deductions. Roth IRAs offer tax deferral and qualified withdrawals are tax free, but no tax deductions.2

4. Use gains – and losses – to your advantage. If you have an investment and hold it for at least one year before selling, you’ll pay a maximum federal tax of 20% on capital gains. The same rate applies for dividend income. 3 Keep it for less than one year and you’ll pay regular income taxes – up to 39.6%. Also keep in mind that if you intend to sell investments that have lost money, you can do so by December 31 and deduct up to $3,000 in investment losses from that year’s tax return. Additional losses can be carried over and used to offset future capital gains.

There are other tax strategies you can use, but be sure to consult your tax professional and investment professional before acting.

Source/Disclaimer:
1 Income may be subject to the alternative minimum tax. Capital gains, if any, are subject to taxes.
2 Withdrawals before age 59½ are subject to a penalty tax. Each type of IRA has respective income limits as well as deductibility rules.
3 Lower rates apply for long-term capital gains and dividends for taxpayers who are in lower tax brackets. An additional 3.8% Medicare tax may also apply.

Because of the possibility of human or mechanical error by Wealth Management Systems Inc. or its sources, neither Wealth Management Systems Inc. nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall Wealth Management Systems Inc. be liable for any indirect, special or consequential damages in connection with subscriber’s or others’ use of the content.

© 2014 Wealth Management Systems Inc. All rights reserved.

Four Weeks to a Better Holiday Budget

You can see it just ahead, looming on the horizon – the holiday season. While children can hardly stand the wait, adults often wish it were a few more months away. Unfortunately, time does not stop. This year, do not wait for the holiday season to put the squeeze on your wallet. Take the time now to plan and budget.

Week one:

Before you spend a cent, start a savings plan. Estimate the total amount you can realistically afford to spend this holiday season. Divide that amount by the number of weeks between now and mid-December. Create a special holiday savings fund and start setting aside your weekly goal. Open a special account for your savings or merely designate an empty coffee can. The important thing is to start saving now.

Week two:

Divide all your holiday expenses by category and do not leave anything out – gifts, decorations, wrapping paper and ribbons, entertaining, greeting cards, postage and charities. Figure out how much you would like to spend on each and write down these goals. Make sure the total does not exceed the limit you set in week one.

Weeks three and four:

Start shopping. Last-minute gift buying often results in spending more than you planned, so do not put it off. Make a list of what you would like to buy for each person and shop around for the best price. The more time you put into your list, the less time you will spend wandering the malls – and the less you will spend on unnecessary or unwanted items. Most important, if you must use credit cards, do not charge more than you can afford to pay off in three months.

By using the time ahead of you to plan and budget, you can reduce the financial headaches that often accompany the holiday season. You may even find yourself looking forward to the holidays as eagerly as the children.

Track Your Progress
Total Savings Goal: $______ Weekly Savings Goal: $______

Spending Plan
Gifts: $______ Greeting Cards: $______
Decorations: $______ Postage: $______
Gift wrap, etc.: $______ Charities: $______
Entertaining: $______

Gift List
Name: Gift Idea: Approximate Cost:
________ ________ $________
________ ________ $________
________ ________ $________
________ ________ $________
________ ________ $________
________ ________ $________
________ ________ $________
________ ________ $________
________ ________ $________
________ ________ $________
Estimated Gift Total: $________

Because of the possibility of human or mechanical error by S&P Capital IQ Financial Communications or its sources, neither S&P Capital IQ Financial Communications nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall S&P Capital IQ Financial Communications be liable for any indirect, special or consequential damages in connection with subscriber’s or others’ use of the content.
© 2013 S&P Capital IQ Financial Communications. All rights reserved.

Are you ready for some Moola Medicine?

Are you suffering from Retail Theraposis, Analysis Paralysis, or Money Mania/Dollar Depression? Time to explore financial pathology and diagnose your moola malady.

Doctor * Kay Dee Cole, CFP ® of Clarity Wealth Development and Nurse Practitioner * Jackie Shaw of Get Organized!, LLC will be on hand to discuss the most prevalent money related disorders, preventative measures, and cures. Join us for a fun filled hour and take back our financial health.

The truth is most of have more stuff than we need or can use. This stuff includes clothing, household goods, sports equipment, and gadgets. Other stuff that we have too much of can include shame, anxiety, and stress.

To cure financial disorders and immunize against them, we focus on reducing the impacts of shame and conventional wisdom through inoculations of awareness and knowledge.

*Register today Moola Maladies*

* We do not have real medical degrees, just a play on words!

Five Ways To Measure Risk

Investors who are concerned about market volatility should examine their investment choices from all angles when constructing a portfolio – evaluating not only return, but risk too.

There are a variety of risk measures that may come in handy. Of course, numbers don’t tell the whole story, but they may help you determine whether owning a particular investment is consistent with your personal risk tolerance. You and your financial advisor may want to review the following risk measures:

1. Alpha is a measure of investment performance that factors in the risk associated with the specific security or portfolio, rather than the overall market (or correlated benchmark). It is a way of calculating so-called “excess return” – that portion of investment performance that exceeds the expectations set by the market as well as the security’s/portfolio’s inherent price sensitivity to the market. Alpha is a common way to assess an active manager’s performance as it measures portfolio return in excess of a benchmark index. In this regard, a portfolio manager’s added value is his/her ability to generate “alpha.”

2. Beta is the statistical measure of the relative volatility of a security (such as a stock or mutual fund) compared to the market as a whole. The beta for the market (usually represented by the S&P 500) is 1.00. A security with a beta above 1.0 is considered to be more volatile (or risky) than the market. One with a beta of less than 1.0 is considered to be less volatile.

3. R-squared (R2) quantifies how much of a fund’s performance can be attributed to the performance of a benchmark index. The value of R2 ranges between 0 and 1 and measures the proportion of a fund’s variation that is due to variation in the benchmark. For example, for a fund with an R2 of 0.70, 70% of the fund’s variation can be attributed to variation in the benchmark.

4. The Sharpe ratio is a tool for measuring how well the return of an investment rewards the investor given the amount of risk taken. For example, a Sharpe ratio of 1 indicates one unit of return per unit of risk, 2 indicates two units of return per unit of risk, and so on. A negative value indicates loss or that a disproportionate amount of risk was taken to generate a positive return. The Sharpe ratio is useful in examining risk and return, because although an investment may earn higher returns than its peers, it is only a good investment if those higher returns do not come with too much additional risk. The higher a portfolio’s Sharpe ratio, the better its risk-adjusted performance has been.

5. Standard deviation is a measure of investment risk that looks at how much an investment’s return has fluctuated from its own longer-term average. Higher standard deviation typically indicates greater volatility, but not necessarily greater risk. That is because standard deviation quantifies the variance of returns, it does not differentiate between gains and losses. Consistency of returns is what matters most. For instance, if an investment declined 2% a month for a series of months, it would earn a low (positive) standard deviation. But if an investment earned 8% one month and 12% the next, it would have a much higher standard deviation, even though by most accounts it would be the preferred investment.

Using a variety of risk measures may give you a more complete picture than any single gauge. Your financial advisor can help you decide which ones will serve your needs and assess the risks and potential rewards associated with your portfolio.

Financial Planning Association
Because of the possibility of human or mechanical error by S&P Capital IQ Financial Communications or its sources, neither S&P Capital IQ Financial Communications nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall S&P Capital IQ Financial Communications be liable for any indirect, special or consequential damages in connection with subscriber’s or others’ use of the content.
© 2013 S&P Capital IQ Financial Communications. All rights reserved.