Design & Management 401(k), 403(b), 457 Plan

Transcription

1 Index Advantage of Investing in a 401(k) Page 2 Traditional or Roth 401(k)? Page 4 Setting up Your 401(k) Page 5 Investment Management Options Page 6 Design & Management 401(k), 403(b), 457 Plan August 2016 Investor Education Investor Education is Critical to reach your Financial Goals Wealth gives you Freedom and Control of your Life Setup an Auto-Investment Plan to Invest on a Regular Basis in Bull and Bear Markets Create a Diversified Portfolio with the Proper Asset Allocation Purchase Quality Investments Manage your Portfolio Properly PDM Investment Services, LLC A Registered Investment Advisor Select Your Risk Level and Portfolio Type Page 7 Asset Allocation Page 8 Designing Your Portfolio Page 8 Asset Class Definitions Page 9 Mutual Fund Selection and Analysis Page 10 Building Your Portfolio Page 11 Maintaining Your Portfolio Page 12 Appendix A Page 13 Mutual Fund Analysis Example Appendix B Morningstar Analysis Screens Page Standish Drive, Troy, Michigan * * info@fginvestor.com For complete disclosure see our website 1

2 Advantage of Investing in a 401(k) A 401(k) is an employer-sponsored retirement-savings plan funded by employee contributions with matching by some companies. Build Wealth for Financial Security Your 401 (k) should be your primary saving account for retirement. The faster you build wealth the sooner you will achieve financial freedom. Be prepared when you get a tap on the shoulder after fifty years old. Pensions are mostly gone and you cannot count on Social Security. If you do not save for retirement, you may never retire or end up living in poverty. Tax Savings Allows you to invest up to $18,000 per year plus company match pre-tax and $24,000 if you are over 50 years old. (2016) Pre-tax money is invested into the account, earnings growth is tax-deferred and distributions are taxable at ordinary income tax rates. Pre-tax money from your pay check is invested, reducing your taxable income. Forced Savings By taking money out of your pay automatically, it forces you to save and is less noticeable since it comes out before taxes. If you contribute $200 from each paycheck, your actual paycheck will only be reduced by $150 if you are at the 25% tax rate. Dollar Cost Averaging You are investing on a regular basis in Bull and Bear Markets eliminating damage from investor emotions. Compounded Returns Compounding returns in a portfolio can grow substantially over time. With compounding, you earn on your initial investment and accumulated gains from each year. The chart below shows how compounding can grow a portfolio. A moderate risk portfolio with a 7.7% annual rate of return, a 2% annual inflation rate and a $1,000 per month contribution would accumulate $1,400,000 in 36 years. (Age 24 to 60). Chart was generated with Riskalyze software. 2

3 401(k), 403(b), 457 Employer Sponsored Plans An employer-sponsored retirement-savings plan funded by employee contributions, company matching and profit sharing. First investment choice if company matching. Pre-tax money is invested into the account. Tax-deferred earnings growth. Average employer match is 60% of first 5%. Always contribute enough to take full advantage of the match. The match will go into the Traditional 401(k) pretax and cannot go into a Roth 401(k) post tax. Taxable distributions. (Ordinary income tax rate) RMD at 70.5 years old unless you are still working at the company issuing the 401(k) and own less than 5% of the company. Ok if you transferred other 401(k) s before 70.5 years old. See Uniform Lifetime Table for distribution based on age and year-end value of account. Penalty free distributions after 59.5 years old. 10% penalty for distributions taken before 59.5 years old. At 55 years old and employment terminated you can take an early partial distribution without a 10% penalty. Funds in company plans are protected by federal law from creditors in bankruptcy and lawsuit judgments, depending on state laws. Annual elective deferred contributions for 2016 are $18,000 and $24,000 if 50 or older at the end of the calendar year. Pace your contributions over the year so you don t hit your own cap too early in the year and miss out on company matches later in the year. Company matches and profit sharing add to the limits above for a combined max of $51, (k) - Defined contribution plan offered by most private and public companies. An employer-sponsored retirement-savings plan funded by employee contributions, 403(b) - Defined contribution plan offered by non-profit hospitals, colleges and public schools. Many 403(b)s are annuity based with higher fees and surrender fees Defined contribution plan offered by state and local governments. Pension - Defined benefit plan offered by about 20% of any type of company. A pension is funded by the company and employees may be required to contribute a percentage of their salary on a pre-tax basis. The payout is based on years of service and age. 401(k) Loans Most advisors do not recommend taking out a loan against your 401(k) unless it is your only option to get emergency cash for food, shelter or medical bills. If your job is not secure, never take out a 401(k) loan. A loan will set you back for retirement savings. Some business owners take a loan against their 401(k) to get a lower interest rate to expand their business. You can generally borrow up to 50% of your 401(k) balance. Loans are generally less than 10 years. The borrowed money is taken out of your 401(k) growth portfolio and no longer grows with the stock market. The interest rate of the loan is generally at or below bank rates. A lower interest rate does not make up for the lost stock market appreciation. You loan payments are taken out of your paycheck after tax reducing your take home pay. If you are no longer working at the company who started your 401(k) most plans will not let you take out a loan. If you are terminated from the company your loan is usually due within 60 days. If you do not have the cash the balance comes out of your investments triggering a 10% penalty and a tax bill. 3

4 Traditional or Roth 401(k)? Typically, you start out in a lower tax bracket, move to a higher tax bracket over your working years and move to a lower tax bracket in retirement. In retirement, it is best to have taxed accounts (only capital gains taxes), traditional IRA s (ordinary income tax rate) and Roth IRA s (tax free) to withdraw from to manage your taxes paid each year. The Traditional 401(k) has pre-tax money going in. Pre-tax money going in gives you more budget flexibility to save more now. Save more now, grow more tax deferred and pay taxes on a larger accumulated amount. Good for higher income workers in a higher tax bracket for a needed tax break. The Roth 401(k) has post-tax money going in. Post-tax money going in gives you less budget flexibility to save more now. Save less now, grow less tax deferred and pay no tax on a smaller accumulated amount. For a Roth 401(k) the employee contribution is post-tax and can be rolled into a Roth IRA and the employer match contribution may be pretax and could be rolled into Traditional IRA depending on the plan. Good for lower income workers in a lower tax bracket now to save on taxes when you are in a higher tax bracket in retirement. A combination of Traditional 401(k) and Roth 401(k) may be best for efficient tax management in retirement. No income restrictions with a Roth 401(k) like a Roth IRA giving you the opportunity to collect some tax-free income in retirement. Common Options Traditional 401(k) only Get maximum tax deferred contribution. Traditional 401(k) contribution of 6% and Roth 401(k) contribution of 3%. Roth 401(k) for first job when in a low tax bracket and Traditional 401(k) in second job when in a higher tax bracket. This decision can often be a wash since many people are in a higher tax bracket during the accumulation phase and a lower tax bracket in the retirement phase. It is often difficult to predict your tax bracket and tax rates in retirement in advance. 4

5 Setting up Your 401(k) (Below is an example of a plan) Setup Login Create a username and password for your 401(k). Log into your 401(k) plan website and select your Plan Name. Every plan website has a different implementation format. The format often changes. Review your plan often for fund option changes. The plan will notify you if funds are dropped, but don t always tell you when funds are added. Setup Contribution Rate You should be contributing as much as you can from each paycheck in bull and bear markets. Always contribute at least the percent amount to get your full match. Company matches vary from 0% to 6%. If your company match is 4%, then you should contribute at least 4% to get the full match. Try to contribute the max of $18,000 plus match per year (2016). For 50 and older, you can contribute $24,000 plus match. Select Change Contribution Rate or Deferral Change Enter your Contribution Percent taking into account your company match, to get as close as possible to the maximum allowed Traditional 401(k) Percent (Pretax money) x% Roth 401(k) Percent (Post tax money) x% Automated annual contribution increase amount x% (1% until desired amount or manually increase after a raise) Future Contribution Elections (New Money Allocation) Select Change Investments or Change Contribution Select Allocate Future Contributions or Change Your Investment Elections Select I Choose my Own and I Manage My Own Enter the New Recommended Allocations to 100% and Accept the Changes Select the box to say you I Read the Prospectus in the past 90 days for each fund Current Allocations (Rebalance Current Money) Select Rebalance or Reallocate Existing Savings Set your Rebalance Notification to 5% Enter the New Recommended Allocations to 100% and Accept the Changes Change the Future Contribution Elections and the Current Allocations to the new allocation. Your portfolio asset allocation and fund selection should be reviewed at least annually and more often in changing market conditions or if mutual funds are added or removed. By updating your allocations each year, you are rebalancing the portfolio selling some of the overvalued funds and buying some of the undervalued funds. 5

6 Investment Management Options Target Date Fund or Asset Allocation Fund (40% of people use) A good place to start your 401(k) for younger employees with a lower amount of accumulated assets. This is the default investment option for most plans. Easiest to manage because you just select the fund for your retirement year and let it go. One fund with a mix of domestic stocks, international stocks and bonds with the proper asset allocation for your risk tolerance and age. Some common target date funds are listed below. T. Rowe Price Retirement 2030 (TRRCX) Vanguard Target Retirement 2030 (VTHRX) Schwab Target 2030 (SWDRX) American Funds 2030 Target Date Retirement Fund (RFETX) JPMorgan Smart Retirement 2030 (JSMIX) Employee Designed Portfolio (50% of people use) Good after accumulating over $10,000 and you are willing to spend the time designing and managing your portfolio. This is good if the plan has quality fund choices in all the primary asset classes. This takes more time to implement and do research. You should review the funds and asset allocation at least annually. Typically select the best fund in each asset class and set the allocations higher and lower in each asset class depending on your forecast. Allows you to invest in the better asset classes and funds and avoid the less favorable ones to possibly help enhance performance. Employee Designed Portfolio, Self-Directed Option (5% of people use) Good if the plan fund choices are poor, limited or use high expense funds. Some plans offer a portion of the account to be held by a custodian like Schwab for you to manage. Infinite mutual fund and stock investment choices. Transaction fees could be higher. This takes even more time to implement and do research. You have to calculate the dollar amount for each investment to invest from the percent and individually perform each trade. You should review the stocks, mutual funds and asset allocation at least quarterly. This is only recommended for experienced investors who will take the time to manage the portfolio properly. Managed Account (5%) This is good for large accounts for people who have no time to manage their portfolio. For a small fee (0.5% in larger plans). The plan will manage your portfolio to your risk level. Managed accounts can outperform target funds over time. Good value proposition if outperforms target fund after fees. Good for older employees approaching retirement that have more money and need financial planning advice. Managed accounts offer a more holistic view of the participant s overall financial situation. Financial Engines is the largest managed account provider. Guided Choice is second. Fidelity is third. 6

7 Select your Risk Level and Portfolio Type Risk tolerance is the amount of price volatility and investment loss you are willing to withstand before changing your behavior. Risk comes in the form of market risk, security risk, financial risk, valuation risk, economic risk, currency risk, political risk, interest rate risk, inflation risk and liquidity risk. Most investors are not trained to know their risk tolerance. At market tops, most people will say their risk tolerance is high. At market bottoms they will say they have no tolerance for risk. The longer your time horizon, the higher the risk you can take. Volatility is only a problem if you sell. There is long-term risk in not owning equities. Consider your need to take risk to reach your goals. How did you react in the past bear markets and corrections? Achieving goals based on a long-term plan is more important than benchmark beating returns each year. In order to participate in bull market gains, you must also endure the risk of corrections and bear markets. Without some risk, reward will likely by small. If you have a large pension, you may be able to take on more investment risk. If your job earned income is very stable into your sixties, you may be able to take on more risk. If the investment will be passed on to heirs, you may be able to take on their level of risk. If you have no debt, you may be able to take on more risk. The more you understand the markets, the more likely you will be comfortable with more risk. Select a portfolio type based on your goals, risk tolerance and time horizon from the table below. Money Large Cap Large Cap Small Cap International Natural Emerging Markets Value Growth Value Resources Markets Bonds Financial Healthcare Mid Cap Technology Small Cap Growth Very Low Risk Moderate Risk High Risk 7

8 Asset Allocation Besides the global stock market, the largest contributor to a portfolio s long-term performance relative to its benchmark is an optimal asset allocation. Based on studies, a portfolio s asset allocation contributes about 70% of a portfolio s performance. Asset Allocation is the most important tool used in portfolio design and management. Security selection is next largest contributor to a portfolio s performance. Tactical asset allocation, also called market timing is not recommended because of its difficulty in producing consistent value. Asset allocation is a systematic way of diversifying a portfolio among different asset classes with varying correlations to each other. Asset allocation determines the mix of asset classes and sectors used to create a portfolio to meet its specified goals and risk level. The most common asset classes are large cap growth, large cap value, mid cap growth, mid cap value, small cap growth, small cap value, international, sectors, bonds and cash. Some sectors perform better in some parts of the economic cycle and worse in other parts. Diversification of non-correlated asset classes will help reduce volatility in a portfolio. Diversification is not a return-enhancement tool it is a risk-reduction tool. Designing Your Portfolio Once you have selected a risk level and portfolio type, select investments in each asset class to build your portfolio to the recommended allocations. Listed below are base allocations for each portfolio risk level. Diversified Mutual Fund Portfolio Asset Allocation 8

9 Asset Class Definitions Large Cap Stocks Large cap stocks are multi-national companies with over $11 billion in market cap. They comprise 70% of the domestic stock market. Mid Cap Stocks Mid cap stocks are companies with between $2 and $10 billion in market capitalization. They comprise 20% of the domestic stock market. Small Cap Stocks Small cap stocks are companies with less than $2 billion in market capitalization. They comprise 10% of the domestic stock market. Small Cap stocks tend to outperform large cap in the recovery year of the economic cycle, when GDP is rising, when in risk-on low volatility mode and when the S&P 500 is strong. Growth Stocks Growth stocks are companies that are growing earnings by at least 10% annually. Their share price is typically higher than current earnings estimates anticipating growth. They are typically more volatile than value stocks. Value Stocks Value stocks are companies that currently have lower earnings growth. They are priced lower than current earnings estimates. They are considered stocks on sale waiting for future growth. Value stocks tend to outperform with falling GDP, risk-off higher volatility and in the transition and correction stage of economic cycle. International Funds International mutual funds invest in stocks listed on foreign exchanges and some domestic companies with high sales overseas. The most common type of international fund is a diversified developed market fund. There are also more aggressive international funds like emerging market funds that invest in China, Asia, Latin America, the Middle East and Africa. Sector Funds Sector funds invest directly into specific sectors. The eight largest sectors of the economy are financial, healthcare, technology, retail, energy, materials, industrial and utilities. Investing in higher growth sectors can enhance returns. In each phase of the economic cycle, certain sectors outperform others. Asset Class Funds and Index Funds Asset class mutual funds invest in specific asset classes like large cap growth, large cap value, mid cap growth, small cap growth and small cap value. Bond Funds Bond mutual funds invest in corporate or government bonds. Bonds vary in maturity time, risk and type. The total return of a bond or bond fund is based on the dividends it pays and the change in net asset value. As interest rates rise, the price of the bond fund falls, reducing its total return. The higher the duration of the bond, the more it is affected by the change in interest rates. The opposite is true when interest rates fall. A 1% rise in long-term rates would mean that a bond with a 10-year duration will be expected to fall 10% in value. Muni bonds are long term bonds so they would suffer also. A bond with a 2-year duration would only fall modestly. Money Market Funds Money Market mutual funds invest in cash type investments or ultra-short-term bonds. Most money market funds are FDIC insured. 9

10 Mutual Fund Selection and Analysis Security selection is next largest contributor to a portfolio s performance. Go to your plan website and print the Fund Option & Performance Report. Research each mutual fund using Morningstar, another mutual fund rating service, the fund prospectus, or fund reports on the plan website. Most plans offer some mutual fund research. Below is a list of criteria to consider when grading a mutual fund. Start by looking up the first three items listed below at minimum, then review the additional criteria. See the Morningstar Screens at the back of the presentation. Many plans are starting to offer passive managed index funds for each asset class. These funds contain stocks in the indexes and have lower internal costs. If there are no better active funds, use the passive index funds. Assign a letter grade based on the parameters above. Basic Mutual Fund Analysis (Critical Parameters) Fund Ticker Symbol If the plan does not contain the fund 5-digit ticker symbols, search for the fund names using Google or Morningstar. If the fund is private and not traceable to independent research, use the plan provided specification sheets. Fund Asset Class LCG, LCV, MCG, MCV, SCG, SCV, INT, BOND, MM, etc. Fund Grade - Morningstar 4-star or 5-star and a gold or silver rating are best. Performance Look for funds that outperformed their category by at least 2% annually over the past three, five and ten year periods. Manager Over 5 years managing the fund. An MBA degree from a top school and CFA designation. Manager has over $500,000 of personal money invested in the fund. Premium Mutual Fund Analysis (Additional Parameters) Performance Consistency Look for funds that outperformed their category at least 70% of the past 10 years. Strategy A sound investment strategy using proven techniques like fundamental and valuation analysis. Turnover Rate Less than 30% turnover is good. Expense Ratio Less than 0.9% expense ratio is good. Fund Size Less than $8 billion fund size is good. Volatility Look for funds that have a beta of less than 1.2. Variation Look for funds that have a standard deviation less than its category. Risk Adjusted Return Look for funds that have a Sharpe Ratio higher than its category. Maximum Downdraft Look for funds that have a lower downdraft than its category. Upside/Downside Capture Ratio Look for funds that have a ratio greater than one. Valuation Look for funds that have the same or lower PE ratio than its category. See appendix B for Premium Mutual Fund Analysis Example. See Appendix C for Morningstar Analysis Screens. 10

11 Building Your Portfolio Select the highest rated funds in each asset class and allocate to the asset allocation that meets your risk tolerance and time horizon. Below is an example of a moderate and aggressive portfolio design. If sector funds are offered, they may be incorporated in the portfolio. Most plan websites have portfolio builder tools and investor education. Some plans offer a portfolio manager service for an annual fee of around 0.5% of assets under management Leaders in bold. MODERATE PORTFOLIO TICKET ASSET ALLOCATION GRADE (75% Stocks / 25% Bonds & Cash) SYMBOL CLASS JPMorgan Large Cap Growth (JPMJT) JLGMX LCG 11% B Vanguard Equity Income Admiral VEIRX LCV 16% A PRIMECAP Odyssey Aggressive Growth POAGX MCG 7% A JPMorgan Mid Value FLMVX MCV 11% A Vanguard Extended Market Index VIEIX SCG MCG 6% B T. Rowe Price US Small Cap Value PRSVX? SCV 10% B American Funds Euro Pacific Growth R4 RERGX INT LCG 5% B Templeton Inst. Foreign Small Cap TFSCX INT MCV 6% B Invesco Developing Markets GTDIX INT EM MKT 3% B PIMCO Total Return (Y=3.4%, D=5yrs, Q=NR) PTTRX ITB 10% B PIMCO Income Fund (Y=3.7%, D=3yrs, Q=NR) PIMIX MULTI BD 10% B Vanguard Prime Money Market Fund VMRXX MONEY MKT 5% B Asset Class Key LCG-Large Cap Growth, LCV-Large Cap Value, MCG-Mid Cap Growth, MCV-Mid Cap Value, SCG-Small Cap Growth, SCV-Small Cap Value, INT-International, INT EM MKT-International Emerging Market, INT BOND-International Bond, HY BOND-High Yield Bond, IT BOND- Intermediate Term Bond, ST BOND-Short Term Bond, MM-Money Market. 11

12 Maintaining Your Portfolio Each year you should review your plan and update your portfolio. Managing a 401(k) can be a challenge due to the following reasons. Companies have been changing to different plans lately. (Start the process from scratch) Plan websites change. (Each time you go on the website to change your allocations the process may be different) Plan funds are removed and new ones added each year. (Research new funds) At a minimum every year in the first quarter do the following: Review plan for fund offering changes. Re-grade mutual funds and replace bad ones with good ones. Change the asset allocation for the new-years economic and market conditions. Rebalance your portfolio. Rebalancing reduces a portfolio s tendency to drift from its target asset allocation and acquire risk-return characteristics that may be inconsistent with an investor s goals and preferences. For most diversified stock and bond portfolios, annual or semiannual monitoring - with rebalancing at 5% thresholds - is likely to produce a reasonable balance between risk control and cost minimization. If an asset class becomes overvalued, you will be selling when it s up. If an asset class becomes undervalued, you will be buying when it s down. Human emotions influence investors in their decision-making process. Investors often behave irrationally, producing inefficient markets and mispriced securities. These mispriced securities create short-term opportunities for the intelligent investor, but hurt the average investor. The ability to buy low and sell high is nearly impossible to do consistently. Create a solid diversified portfolio and stick with it through the ups and downs of the market. Experience and a calm rational decision making process are needed to guide you through volatile markets. Portfolio Performance Monitor Every January, at a minimum, your portfolio should be reviewed for performance. Your portfolio performance for the year can be found on your December brokerage statement or the custodian website. Performance can be calculated by using the beginning of the year balance, end of the year balance and making adjustments for cash inflows or outflows. Below are common benchmarks to compare your portfolios with. 2015: Fidelity Asset Manager 70% Moderate Risk Benchmark (FASGX) saw a -0.6% return. 2014: Fidelity Asset Manager 70% Moderate Risk Benchmark (FASGX) saw a 5.6% return. 2013: Fidelity Asset Manager 70% Moderate Risk Benchmark (FASGX) saw a 20.1% return. 2012: Fidelity Asset Manager 70% Moderate Risk Benchmark (FASGX) saw a 14.1% return. 2015: Fidelity Asset Manager 85% Moderate-Aggressive Risk Benchmark (FAMRX) saw a -0.6% return. 2014: Fidelity Asset Manager 85% Moderate-Aggressive Risk Benchmark (FAMRX) saw a 5.9% return. 2013: Fidelity Asset Manager 85% Moderate-Aggressive Risk Benchmark (FAMRX) saw a 25.2% return. 2012: Fidelity Asset Manager 85% Moderate-Aggressive Risk Benchmark (FAMRX) saw a 15.9% return. 12

13 Appendix A Mutual Fund Analysis Example Strategy The Fidelity Low Priced Stock Fund is in the Mid Cap Value asset class. Joel Tillinghast has been manager since 1990 and has over $1,000,000 of his own money in the fund. He has an MBA degree and is a CFA. Tillinghast looks for companies with a share price of $35 or less, but that is a marketing gimmick. He buys mostly smaller-cap fare with reasonable valuations and solid growth prospects. He spreads the portfolio across many hundreds of holdings. The fund is also willing to devote a substantial chunk of the portfolio to foreign issues and larger-cap stocks and will let cash build if he can't find enough good investment opportunities. It does not hedge foreign-currency exposure. They put deep research into companies and look for solid growth and reasonable valuations. The turnover rate is low at 9%. The fund has a low expense ratio of 0.8%. The fund size is very large at $40 billion in assets under management. Performance The fund outperformed its category by 2% annually in the past 3 years, outperformed by 2% in the past 5 years, outperformed by 2% in the past 10 years and outperformed by 3% in the past 15 years. Source: 13

14 Performance Consistency The fund has outperformed its category in 85% of the years between 2000 and Risk & Reward The fund volatility is slightly lower than the volatility of its category and the variation is less than its category. The risk-adjusted return is 20% higher than its category risk-adjusted return. The maximum downdraft was 37% in 2008, equal to the S&P 500 loss of 37%. The up/down capture ratio is neutral at 1.1. Valuation The fund valuation is lower than its category. Summary This fund is strong in most areas with an A overall rating, making it one of the best funds in its category. The fund is OPEN to new investors with a $2,500 minimum for taxable accounts and $2,500 for IRAs. The fund is no-load but carries a transaction fee through Scottrade and Schwab. 14

15 Appendix B - Morningstar Analysis Screens Standard Version Free Premium Version - $189 per year Quote Screen Locate the fund ticker symbol, Morningstar grade and asset class. YACKX, 5 start gold, Large Cap Blend Turnover Rate Less than 30% turnover is good. 7% Expense Ratio Less than 1.1% expense ratio is good. 0.76% Fund Size Less than $8 billion fund size is good. $11.3 billion. 15

16 Morningstar Analysis Screens Standard Version Performance Screen Performance Consistency - Look for funds that outperformed their category at least 70% of the past 10 years. Performance - Look for funds that outperformed their category by at least 2% annually over the past three, five and ten year periods. Maximum Downdraft Look for funds that have a lower downdraft than its category. 16

17 Morningstar Analysis Screens Management Screen Standard Version Analysis Screen - Premium Version Management & Analysis Screen Manager - Look for a manager with over 5 years managing the fund an MBA degree from a top school and CFA designation and over $500,000 of personal money invested in the fund. Strategy - Look for a sound investment strategy using proven techniques like fundamental and valuation analysis. 17

18 Morningstar Analysis Screens Standard Version Ratings & Risk Screen Volatility Look for funds that have a beta of less than 1.2. Variation Look for funds that have a standard deviation less than its category. Risk Adjusted Return Look for funds that have a Sharpe Ratio higher than its category. Upside/Downside Capture Ratio Look for funds that have a ratio greater than one. Alpha Look for funds that have an alpha greater than two, 2% better performance than its category. 18

19 Morningstar Analysis Screens Standard Version Portfolio Screen Valuation Look for funds that have the same or lower PE ratio than its category. 19