Word Play…Answers in a few days

Zero

M.D.

PhD.

1. ________________

Knee

Light

2 __________________

Ground

Feet, feet, feet, feet, feet, feet

3. ____________________________

He’s  Himself

4. ___________________

Ecnalg

5. ______________________

Death…life

6. ___________________________

cycle, cycle, cycle

7. ___________________________

Stand

I

 8. _____________________________

Measuring Risk

Measuring Risk

What is risk?

In the investment world, risk means uncertainty. It refers to the possibility that you will lose your investment or that an investment will yield less than its anticipated return. Simply stated, risk is the degree of probability that an investment will make or lose money.

When evaluating risk, there are two important elements to understand. The first is the investor's own ability to tolerate risk, and the second is the risk of the investment itself.

Why is it important (risk vs. return)?

When you make an investment, you plan to make money on that investment, or, more accurately, earn a return. Risk and return are directly related. The higher the risk, the higher the potential return, but also the greater the risk of loss. This fundamental principle is called the risk-return tradeoff.

How does an individual investor evaluate risk?

An investor must consider many factors when evaluating the risk of an investment or an investment portfolio.

Identify financial goals

The first step in evaluating risk is to clearly define your financial goals. For example, if you are young and plan for your investment to provide your retirement, you may be willing to assume more risk in exchange for a higher expected return. However, if you have children who are reaching college age, or you may otherwise need cash within a short time, you may not want to put money into high-risk vehicles. Clarifying the reasons you want to invest can be a key component in determining what level of risk you are comfortable assuming. The following questions may help you to assess your financial goals:

·        

·       What do you plan to do with any money earned by the investment?

·       How much money will you need?

·       When will you need the money?

·       Can you afford to forgo the expected return?

·       Can you afford to lose the principal?

Understand your risk tolerance

Each investor is able to accept a certain amount of investment risk. This is referred to as the investor's risk tolerance. The concept of risk tolerance is twofold, referring to both the investor's desire to assume risk and financial capacity to assume risk. An investor should never assume risk beyond his or her capacity, even if personal desire exceeds that capacity. On the flip side, an investor should not assume risk at full capacity if doing so will make him or her to lose sleep at night.

Risk tolerance is highly individual and subjective, depending on a number of factors, including the investor's age, stage in life, emotional temperament, attitude, and investment experience. Thus, an investor's risk tolerance is not static, but changes over the course of his or her life.

Because of these changes and because of the emotional component involved, it can be challenging to measure your risk tolerance with a high degree of accuracy. However, there are tests that help estimate an investor's risk tolerance at a given point in time.

Determine your investment time horizon

The period of time for which you plan to stay invested in a particular vehicle is referred to as your investment planning time horizon. Generally speaking, the longer your time horizon, the more you can afford to invest more aggressively, in higher-risk investments. This is because the longer you can remain invested, the more time you'll have to ride out fluctuations in the hope of getting a greater reward in the future. Of course, there is no assurance that any investment will not lose money.

What are the basic risks of investing?

Investment risk can be classified into two broad types of risks: (1) systematic or undiversifiable, and (2) unsystematic or diversifiable. Systematic risk is caused by economic, social, and political factors. These risks cannot be reduced by diversifying your portfolio. Unsystematic risks are associated with factors particular to the underlying company or industry, and can be reduced by diversification.

How is risk measured?

Risk is a rather fluid concept, yet experts have developed ways to measure it. To them, risk equals volatility, fluctuations in the price of a security or index of securities. The more fluctuation, the higher the volatility. Generally, the higher the volatility, the higher the risk--but also the potential for a higher rate of return.

Example(s):   Say that you have two investments. One always returned exactly 8 percent every single year, while the second investment's return rate varied, gaining 15 percent one year, losing 3 percent the next year, then gaining 10 percent, then losing 13 percent, and so on. The first investment is characterized as having low volatility, low risk. The second investment is characterized as having higher volatility, higher risk.

Low-volatility investments are those whose performances are easier to predict than investments that are highly volatile. For example, although stock in well-established firms, such as General Electric, General Mills, or other blue chip companies can experience significant price fluctuations, the probability of this occurring is low. On the other hand, investors have come to expect fairly wide swings in the price of small-cap stock.

Volatile stocks tend to be those of small companies with few shareholders because they face challenges from the economy, rivals, and customers on a regular basis, or those of companies classified as "shooting stars." A shooting star is a company that is experiencing growth at a rapid rate, but whose future is unpredictable. Stocks of small technology companies often are examples of this type.

The stock market has experienced extremely high volatility over the last few years. Record highs and unprecedented one-day declines have some investors feeling quite optimistic and others feeling very concerned.

What are the methods of measuring risk?

Measuring risk involves the use of mathematical tools and techniques, and assumes that volatility increases your risk of loss--and that risk worsens as your time horizon shrinks.

Standard deviation

The standard way to calculate the risk of a particular investment is to calculate the standard deviation of its past prices. This method measures an investment's pure volatility. Standard deviation is a measure of the variation around an average or mean. In the case of an investment, the standard deviation measures how far away from the average the return rate for any one year is likely to be.

Example(s):   An investment whose rate of return never varies at all has a standard deviation of zero. An investment whose rate keeps varying, but always lies exactly 10 percent away from the average rate, has a standard deviation of 10 percent. Generally, the greater the standard deviation, the more variable the return and the riskier the investment.

One drawback to the standard deviation method is that some investors may think of deviation only as a negative, forgetting that prices fluctuate up as well as down. While it's true that greater fluctuations may increase the risk that you may have to sell at an inopportune time, some investors prefer to try to take advantage of large price fluctuations in a stock with a high standard deviation.

Beta

A better method of measuring risk is referred to as beta. Beta measures an individual investment's volatility in relation to the stock market in general, as measured by the Standard & Poor's 500 Stock Index (S&P 500). The S&P 500 has a beta of 1. A security whose value goes up and down 25 percent less than the S&P 500 has a beta of 0.75; in other words, it has historically had less volatility than the market as a whole. A security whose value goes up and down 25 percent more than the S&P 500 has a beta of 1.25, meaning it has typically been more volatile than the overall market.

This measurement is also useful because it suggests how far you can anticipate your investment might fall when the market falls, and, conversely, how much your investment may rise when the market rises. Be aware, however, that beta measures market risk only, not an investment's or investment portfolio's total risk.

Alpha

Alpha measures an investment's beta against its actual performance. A positive or high alpha implies that the investment has outperformed the market, whereas a negative or low alpha implies the opposite.

Example(s):   Say that this year U.S. savings bonds returned 6 percent, the S&P 500 returned 10 percent, and your investment returned 12 percent. Your investment's beta is 1.2 (see above). You would ordinarily expect that your investment would yield at least as much as the U.S. savings bonds. However, the market (S&P 500) returned 4 percent more than the bonds (10% - 6%). Therefore, you should expect your investment to yield 6 percent (bonds), plus its beta (1.2) times 4 percent (the extra return), which is 10.8 percent [6% (1.2 x 4%)]. Your investment, though, actually earned 12 percent, which is 1.2 percent more than you expected (12% - 10.8%). Your investment's alpha, then, is 1.2. Had your investment returned only 6 percent, it would have an alpha of -4.8.

Treynor index

The Treynor index measures the excess return per unit of risk taken. The higher the Treynor index, the more return the investment is making per unit of risk it is taking.

Style analysis

Style analysis is a statistical method that identifies how a mutual fund performs compared to individual global asset classes. Broadly defined, global asset classes include large cap stocks, small cap stocks, foreign stocks, emerging market stocks, domestic bonds, international bonds, and cash. Values, called factors, are used to represent how closely a fund's performance matches the performance of indexes representing the different global asset classes.

R-squared

R-squared is a measure of a mutual fund's diversification relative to the market. You can use R-squared to evaluate how likely a fund's return is to resemble the return of a given index; the higher the R-squared number, the greater the correlation between the two.

Securities and Investment Advisory Services may be offered through NFP Advisor Services, LLC, (NFPAS), member FINRA/SIPC. NFPAS may or may not be affiliated with the firm branded on this material.

Charitable Giving

Charitable Giving

When developing your estate plan, you can do well by doing good. Leaving money to charity rewards you in many ways. It gives you a sense of personal satisfaction, and it can save you money in estate taxes.

A few words about transfer taxes

The federal government taxes transfers of wealth you make to others, both during your life and at your death. In 2015, generally, the federal gift and estate tax is imposed on transfers in excess of $5,430,000 and at a top rate of 40 percent. There is also a separate generation-skipping transfer (GST) tax that is imposed on transfers made to grandchildren and lower generations. For 2015, there is a $5,430,000 exemption and the top rate is 40 percent.

You may also be subject to state transfer taxes.

Careful planning is needed to minimize transfer taxes, and charitable giving can play an important role in your estate plan. By leaving money to charity the full amount of your charitable gift may be deducted from the value of your gift or taxable estate.

Make an outright bequest in your will

The easiest and most direct way to make a charitable gift is by an outright bequest of cash in your will. Making an outright bequest requires only a short paragraph in your will that names the charitable beneficiary and states the amount of your gift. The outright bequest is especially appropriate when the amount of your gift is relatively small, or when you want the funds to go to the charity without strings attached.

Make a charity the beneficiary of an IRA or retirement plan

If you have funds in an IRA or employer-sponsored retirement plan, you can name your favorite charity as a beneficiary. Naming a charity as beneficiary can provide double tax savings. First, the charitable gift will be deductible for estate tax purposes. Second, the charity will not have to pay any income tax on the funds it receives. This double benefit can save combined taxes that otherwise could eat up a substantial portion of your retirement account.

Use a charitable trust

Another way for you to make charitable gifts is to create a charitable trust. There are many types of charitable trusts, the most common of which include the charitable lead trust and the charitable remainder trust.

A charitable lead trust pays income to your chosen charity for a certain period of years after your death. Once that period is up, the trust principal passes to your family members or other heirs. The trust is known as a charitable lead trust because the charity gets the first, or lead, interest.

A charitable remainder trust is the mirror image of the charitable lead trust. Trust income is payable to your family members or other heirs for a period of years after your death or for the lifetime of one or more beneficiaries. Then, the principal goes to your favorite charity. The trust is known as a charitable remainder trust because the charity gets the remainder interest. Depending on which type of trust you use, the dollar value of the lead (income) interest or the remainder interest produces the estate tax charitable deduction.

Why use a charitable lead trust?

The charitable lead trust is an excellent estate planning vehicle if you are optimistic about the future performance of the investments in the trust. If created properly, a charitable lead trust allows you to keep an asset in the family while being an effective tax-minimization device.

For example, you create a $1 million charitable lead trust. The trust provides for fixed annual payments of $80,000 (or 8 percent of the initial $1 million value of the trust) to ABC Charity for 25 years. At the end of the 25-year period, the entire trust principal goes outright to your beneficiaries. To figure the amount of the charitable deduction, you have to value the 25-year income interest going to ABC Charity. To do this, you use IRS tables. Based on these tables, the value of the income interest can be high--for example, $900,000. This means that your estate gets a $900,000 charitable deduction when you die, and only $100,000 of the $1 million gift is subject to estate tax.

Why use a charitable remainder trust?

A charitable remainder trust takes advantage of the fact that lifetime charitable giving generally results in tax savings when compared to testamentary charitable giving. A donation to a charitable remainder trust has the same estate tax effect as a bequest because, at your death, the donated asset has been removed from your estate. Be aware, however, that a portion of the donation is brought back into your estate through the charitable income tax deduction.

Also, a charitable remainder trust can be beneficial because it provides your family members with a stream of current income--a desirable feature if your family members won't have enough income from other sources.

For example, you create a $1 million charitable remainder trust. The trust provides that a fixed annual payment be paid to your beneficiaries for a period not to exceed 20 years. At the end of that period, the entire trust principal goes outright to ABC Charity. To figure the amount of the charitable deduction, you have to value the remainder interest going to ABC Charity, using IRS tables. This is a complicated numbers game. Trial computations are needed to see what combination of the annual payment amount and the duration of annual payments will produce the desired charitable deduction and income stream to the family.

Umbrella Policies

Umbrella Liability Insurance

When your local weather forecaster tells you that it's going to rain, what do you do? That's easy--you reach for your umbrella. So why not purchase an umbrella that can protect you in stormy financial weather? Umbrella liability insurance (ULI) can do just that. By providing liability protection above and beyond the basic coverage that homeowners/renters and auto insurance policies offer, ULI can protect you against the catastrophic losses that can occur if you are sued.

Although ULI can be purchased as a separate policy, your insurer will require that you have basic liability coverage (i.e., homeowners/renters insurance, auto insurance, or both) before you can purchase an umbrella liability policy. ULI is often referred to as excess coverage. If you are found to be legally responsible for injuring someone or damaging someone's property, the umbrella policy will either pay for the part of the claim in excess of the limits of your basic liability policy, or pay for certain losses that are not covered.

Why now? It's not even raining

 These days, it's not unusual to hear of $2 million, $10 million, and even $20 million court judgments against individuals. If someone is injured in your home, or if you cause a serious auto accident, you could have to pay such a judgment. If you don't have an umbrella liability policy at the time of the accident, anything above the limits of your homeowners/renters or auto insurance policy will have to come out of your pocket.

Here's an example of how ULI works to protect you. Say you have an auto insurance policy with a liability limit of $100,000 per accident. You also have a $1 million umbrella liability policy. You're later found responsible for a serious automobile accident, and the court finds you liable for $700,000 in damages. In this case, your auto insurance would pay the first $100,000 of the judgment, which would satisfy the deductible under your umbrella policy. Your umbrella policy would then cover the portion of the judgment not covered by your auto insurance ($600,000).

You should also be aware that certain types of liability claims (e.g., libel and slander) are not covered under basic homeowners, auto, or other types of insurance policies. An endorsement can be added to these policies to provide some protection against these types of personal injury claims. Or, you can purchase ULI, which does cover these claims.

What's covered?

A typical umbrella liability policy provides the following protection, up to the coverage limits specified in the policy:

•    Protection for claims of bodily injuries or property damage caused by you, members of your household, or hazards on your property, for which you are found legally liable

•    Personal liability coverage for incidents that occur on or off your property

•    Additional protection above your basic auto policy for auto-related liabilities

•    Protection against non-business-related personal injury claims, such as slander, libel, wrongful eviction, and false arrest

•    Legal defense costs for a covered loss, including lawyers' fees and associated court costs

•     

What's not covered?

Umbrella liability insurance typically provides extremely broad coverage. Furthermore, if something is not expressly excluded from coverage, it is covered. Exclusions vary from one insurer to another and from one policy to another, but the following are some items typically excluded from coverage:

•    Intentional damage caused by you or a member of your family or household

•    Damages arising out of business or professional pursuits

•    Liability that you accept under the terms of a contract or agreement

•    Liability related to the ownership, maintenance, and use of aircraft, nontraditional watercraft (e.g., jet skis, air boats), and most recreational vehicles

•    Damage to property owned, used, or maintained by you (the insured)

•    Damage covered under a workers' compensation policy

•    Liability arising as a result of war or insurrection

•     

How big of an umbrella are we talking about?

Determining how much liability coverage you need is not an exact science. You might think that you need only enough liability insurance to protect your assets, but a large judgment against you could easily wipe out your assets and put your future earnings in jeopardy. That's why you should also consider factors such as how often you have guests in your home, whether you operate a home-based business, how much you drive, whether you have teenage drivers in your home, and whether your lifestyle gives the impression that you have "deep pockets."

Coverage limits vary, but a typical policy will provide liability coverage worth $1 million to $10 million. Of course, as your coverage limit increases, the premium will also increase. You need to decide both how much insurance you need and how much insurance you can afford. You'll want to have enough protection, but not too much. Look at it this way: Have you ever seen a five-year-old child walking under a big golf umbrella or a 300 lb. football player using a pocket-sized umbrella? One has too much protection and the other not enough. Your insurance agent can help you determine how much coverage you need.

Where can I buy an umbrella liability policy?

Almost any insurer who writes auto and home insurance policies will also sell umbrella liability policies. In fact, you may be eligible for a multipolicy discount if you purchase an umbrella policy from your current insurer. Of course, it's important to shop around and make sure that you're getting the right coverage for your needs and the most coverage for your money. If you want to do some research on your own, try surfing the Internet, where you can get price quotes and answers to your questions in an instant.