Your Net Worth

Manage

Understand

Grow

TRANSFORMING YOURFINANCIAL FUTURE

If you answered yes to any of these questions, don’t worry. You’re not alone. Years ago, we didn’t have to make as many money-related decisions. Corporate pensions took care of our financial wellness by guaranteeing a certain income in retirement – irrespective of our saving habits. With the nationwide shift to defined contribution plans (your 401k), our retirement fate is now in our own hands.

Trouble is, there’s been no matching national financial education program that equips us to make optimal investing decisions. Worse, we know from behavioral economics that our emotions impede us from making healthy financial decisions.

But Personal Capital is changing that. I’ve spent the last 25 years dragging the financial industry into the 21st cen-tury, building products like TurboTax, Quicken and PayPal. My eureka moment came when I realized most people’s

finances are still chaotic. Unless, of course, you’re a Personal Capital client. Our simple apps help you get your money organized. Our content gives you the framework to get started on – or accelerate – your path to a bet-ter financial future. And when you’re ready to invest, our advisors give you sound, informed guidance to develop a custom investing strategy that works for you.

In these pages, we take you through some of the funda-mental things you should think about as you take steps to transform your financial future. Skim through or take a deeper dive, according to your interests. We’re sharing this important information with you because we realize you work hard for your money. Now, let us help you make the most of it.

A few insights from a financial industry veteran.

Have you ever wondered, What am I not doing with my money that I should be?

Or looked at your brokerage statement during tax season and wondered, What does this fine print actually mean?

Have you taken a step back to ask, Am I on track with my investment strategy?

Or even, Do I have a strategy at all?

Bill HarrisCEO, PERSONAL CAPITAL

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Get Organized

Identify Your Goals

Start Saving

Start Investing

Allocate Your Assets

Identify Your Risk Level

Pick Stocks Or Track The Market

Choose Investment Vehicles

Rebalancing & Taxes

Stock Options & Equity Compensation

About Personal Capital

Additional Resources

Bill HarrisCEO, PERSONAL CAPITAL

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GET ORGANIZED

ASSETS

LIABILITIES

• Cash + money in checking and savings accounts• Investments, IRAs, 401k, other retirement accounts• Bonds and stocks• Your home and any other real estate you own• Valuable personal property like vehicles and jewelry

• What you owe on your assets (for example, a home mortgage or car loan)

• Other debts like student loans and credit cards

Companies use financial statements – balance sheet, income statement, cash flow statement and statement of shareholders’ equity – to understand and communicate their financial condition. Without these tools, making smart financial decisions is virtually impossible. Can you imagine a company operating without them?

The same holds true for people: It’s hard to make informed financial decisions without knowing your financial condition. However, few of us keep regular financial statements. Why? Because even if you manage to enter all of your data in a spread-sheet, it’s a lot of work to maintain it over time.

Fortunately, Personal Capital’s award-winning technology and financial tools have made this process easier. Start by asking yourself some basic questions:

• What are your overall cash inflows and outflows?

• What are you earning after taxes each month?

• What are you spending?

• What are you saving?

Answer these questions by identifying all the accounts that impact your cash flow:

• Checking accounts, savings accounts and credit card accounts are your primary accounts. Cash inflows are deposits plus interest. Cash outflows are all of your spending.

• Investment accounts, such as your 401k, brokerage accounts and IRA, also have import-ant cash flows. For these, cash inflows are your earnings and cash outflows are your losses, fees and taxes.

• Loan accounts, like your student loan and mortgage, also impact your cash flow. Cash inflows are any money you borrowed. Cash out-flows are interest and principal you paid.

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IDENTIFY YOUR RISK LEVEL

Here’s a list of questions to start with:

• At what age would you like to retire?

• How would you like to live in retirement (i.e., what are your projected spending levels)?

• Do you want to buy your first home? Or a second home?

• What education expenses are you expecting (or would you like) to pay for?

• Do you have any near-term financial outlays, like going on a big vacation or buying a car?

After you’ve tallied up what you have, it’s time to map out where you want to be. Identifying your goals is the best way to start achieving them. Whether you do it on your own or sit down with a financial planner, you should dedicate some time to articulating your financial goals.

ASSETS

LIABILITIES

• Cash + money in checking and savings accounts• Investments, IRAs, 401k, other retirement accounts• Bonds and stocks• Your home and any other real estate you own• Valuable personal property like vehicles and jewelry

• What you owe on your assets (for example, a home mortgage or car loan)

• Other debts like student loans and credit cards

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START SAVING

Once you’ve taken stock of where you are and where you want to be, figuring out how much to save is easy. There are a couple of ways to get to that number.

THE 4% RULE

Before technology offered us a better way, the 4% rule provided a general rule of thumb to help build a simple savings model. Here’s how it works: Let’s say you’d like to spend $60,000 a year in retirement. To keep round numbers, let’s also assume you can expect $20,000 a year in Social Security (the average benefits amount for a retired worker in 2015 was $16,0201) and you have no other expected earnings streams. That means you need to get $40,000 in after-tax income from somewhere else.

The 4% rule states that you’ll generally be safe from depleting your savings if you spend less than 4% of your portfolio each year. So if you’re looking for $40,000 a year in income, your portfolio needs to be $1 million ($40,000 divided by 4%). The accompanying table shows the required portfolio values for various levels of desired spending using the 4% rule (assuming $20,000 in Social Security).

THE EASIER WAY

Fortunately, technology offers a more robust, comprehensive way to plan for your financial fu-ture. Online retirement planners are sophisticated, yet easy-to-use tools that allow you to input your expected earnings, savings and financial events between now and your desired retirement age.

Personal Capital’s Retirement Planner is the most sophisticated, realistic retirement planning calculator available today. And it’s completely free when you join Personal Capital. With Retirement Planner, you’ll know exactly where you stand relative to your retirement goals. You can build, manage and forecast your retirement plan from one central place. You can try it out today by logging in to the Personal Capital Dashboard.

WANT TO SPEND?

$50K

$1OOK

$15OK

$2OOK

YOU’LL NEED

$750K

$2M

$3.3M

$4.5M

* Note: This information is for illustrative purposes only, and is not intended to serve as specific investment advice. It is not intended to represent the past or future performance of any specific investments.

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START INVESTING

Thankfully, savings isn’t the only way you can grow your money. You can also invest it.

Investing rocks because of the power of com-pound interest. It’s a simple but powerful concept: interest on interest. As you’ll remember from a long-ago math class, $100 growing at 10% will be $110 after one year and $121 after two years (not $120). Of course with investing, there’s always a risk of a loss. But the power of compound interest means that getting that extra 1% return, or begin-ning one year earlier, can make a big difference. That’s especially true when it comes to your long-term money like retirement accounts.

The chart above shows how different growth rates impact a portfolio over time (specifically, a 30-year-old investor’s portfolio).At age 64, the portfolio that grew at 8% is worth over $1 million more than the portfolio that grew at 4%.

Similarly, starting early is incredibly helpful. The other chart illustrates how starting earlier can trump starting later and saving more money. In the example, Susan, who started 10 years earlier, ends up with a bigger portfolio than Bill despite having saved $100,000 less. Of course, saving more over a long period of time beats both approaches (which is why Chris wins).

$

500K

1.0M

1.5M

2.0M

AGE 30 44 64

8%

6%

4%

PORTFOLIO GROWTH*

$

200K

400K

600K

800K

1.0M

1.2M

AGE 25 40 65

GROWTH OF SAVINGS ACCOUNTS**

Chris invests $5k annually between the ages of 25 and 65. In total, he invests $200k.

Susan invests $5k annually between the ages of 25 and 35. In total, she invests $50k.

Bill invests $5k annually between the ages of 35 and 65. In total, he invests $150k.

* The Portfolio Growth chart assumes a $10,000 beginning portfolio, a $10,000 per year savings rate and the three growth rates shown. Transaction costs, management fees, taxes, market volatility, inflation and other factors, all of which would impact returns, are not considered in the analysis. This information is for illustrative purposes only, and is not intended to serve as specific investment advice. It is not intended to represent the past or future performance of any specific investments.

** The Growth of Savings Accounts chart is for illustrative purposes only and is not indicative of any investment. Account value in this example assumes a 7% annual return. Source: JP Morgan Asset Management.

$

500K

1.0M

1.5M

2.0M

AGE 30 44 64

8%

6%

4%

PORTFOLIO GROWTH*

$

200K

400K

600K

800K

1.0M

1.2M

AGE 25 40 65

GROWTH OF SAVINGS ACCOUNTS**

Chris invests $5k annually between the ages of 25 and 65. In total, he invests $200k.

Susan invests $5k annually between the ages of 25 and 35. In total, she invests $50k.

Bill invests $5k annually between the ages of 35 and 65. In total, he invests $150k.

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ALLOCATE YOUR ASSETS

So you’re convinced you need to start investing. Where do you begin?

It all starts with asset allocation. To get some perspective on the importance of smart asset allocation, let’s consider an institution that seeks to make money by investing it. A good example is the Stanford University Endowment. If you were to check out Stanford’s annual report, you’d see that the first aspect of its investing strategy addressed is asset allocation.

Why does asset allocation come first? Research has shown that over 90% of a portfolio’s return variability is due to asset allocation – more than market timing and security selection.2

The basic principle of asset allocation is that you can distill the universe of investment opportuni-ties down to sets of investment types that react

to market stimuli differently. You can track the relationship via historical “correlations” and, with relatively simple mathematical models, figure out the optimal blend of asset classes for every given level of risk. A word of caution: While the concept is straightforward, the math can get complicated when balancing historical perfor-mance with future market projections, so this one is best left to experts.

How does it work? It’s all due to diversification, which has been called the only free lunch in investing. While the return of a diversified port-folio will be equal to the average rates of return of the individual holdings, the risk of the portfolio (as measured by the standard deviation) will be less than the risk of the individual holdings.

When you link all of your investment accounts to Personal Capital, you can see your personal asset allocation calculated for you. The tool, accessed via the Dashboard, classifies all of your investments by breaking down any funds you own into their component securities and tagging them with asset classes.

WHAT’S MY ASSET ALLOCATION?

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IDENTIFY YOUR RISK LEVELIDENTIFY YOUR RISK LEVEL

You may have noted that we described an optimal allo-cation as that which maximizes return for a given level of risk. But what level of risk is most comfortable for you? To answer that question, consider your age, when you plan to retire, and your risk tolerance (how much you can stomach). It’s important to note that you may have different parts of your portfolio for which different risk levels are appropriate. For instance:

Buying a house in the next two years (conservative and liquid)

Sending your kids to school in 15 years (moderately conservative)

Retiring in 30 years (aggressive)

Once you figure out the right risk level for your invest-ments, you can identify the appropriate asset allocation that maximizes your return potential for that level of risk.

EFFICIENT FRONTIER

KEY RISK TERMS

THE SHARPE RATIO

ACTIVE INVESTING

PASSIVE INVESTING

An allocation (or set of portfolios) that maximizes return for different levels of risk.

The amount of return per unit of risk.

Attempting to generate superior returns by picking specific securities or timing the market by shifting in and out of various asset classes.

Determining a long-term target asset allocation, and then using a low-cost indexing approach to maintain that allocation.

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PICK STOCKS OR TRACK THE MARKET

With your asset allocation set, it’s time to select the securities or funds that should go in your port-folio. There are two general approaches here: you can be an active investor or a passive investor. An active investor picks investments to beat the market, and a passive investor seeks to build a portfolio to track the markets. How should you decide on which approach to take?

To help frame this decision, let’s turn to the exam-ple of the legendary investor Warren Buffett. He’s an active investor. And not just any active investor. A 2011 study found he has done better than any stock or mutual fund that’s been around over 30 years on a risk-adjusted basis. Turns out, he’s an anomaly: 74% of active mutual fund managers underperform their respective indexes, according to S&P’s mutual fund performance data. That means most profes-sional investors who try to beat the market fail to do so. And therefore, most individuals who try to pick managers to beat the market are leaving returns on the table. It’s no surprise that even Warren Buffett counsels the broader population to stick with pas-sive investing.

Based on our own experience watching tens of thou-sands of people invest, we agree that most individual investors are better off with a passive approach. Most academics agree as well (see the Additional Resources page). But even with a passive strategy, there’s still work to be done. You still need to decide your risk tolerance and pick the right asset allocation. After that, you have to pick the right investment vehi-cles and maintain your portfolio over time.

• An analysis of your existing portfolio (make sure all your investment accounts are linked so it’s complete)

• A recommendation for an optimal portfolio based on your profile information

• A comparison of your current strategy to your target strategy, including historical performance, projected future performance and risk-reward trade-offs

• Actionable advice on how you might improve your portfolio by rebalancing

Once you know your asset allocation, figure out if it’s right for you with our Investment Checkup tool. The app will give you:

INVESTMENT CHECKUP

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CHOOSE INVESTMENT VEHICLES

As an individual investor, your primary options for investment vehicles are individual securities (stocks and bonds) and funds (mutual funds and exchange traded funds, or ETFs).

Generally speaking, funds are the best and eas-iest way for most people to get broad market access. In other words, they offer access to a diversified pool of securities that could help you gain exposure to an asset class.

We prefer ETFs because they’re typically low-fee and more tax-efficient. Mutual funds are okay in retirement accounts because they’re tax-deferred. However, the average fee is 1.16% for mutual funds, compared to 0.64% for ETFs (according to the 2013 Lipper’s Quick Guide to OE Fund Expenses). Individual securities are good, but can be unwieldy. For both stocks and bonds, you have to buy a lot of them to get diversification. And for bonds, you may face high transaction costs and high minimum investment sizes.

GENERALLY GREAT

STAY CAUTIOUS

• Diversification, low fee, tax efficient• Blunt, not customizable

• Diversification, easy to buy, good in 401ks• Performance, tax-inefficient (only matters in

taxable accounts), high fee, opaque

ETFs

MUTUAL FUNDS

• Targeted, no fee, maximum tax efficiency• Difficult to diversify, time-consuming

STOCKS

• Can be held to maturity, no fee• High transaction costs, difficult to diversify

INDIVIDUAL BONDS

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REBALANCING & TAXES

Because markets are constantly changing, as is your life, you can’t just design your portfolio, set it and forget it – unless you have someone managing it for you. While getting the design right is half the battle, once you’ve set your portfolio there’s more work to be done. The two critical areas of portfolio maintenance are adjusting your portfolio mix (rebalancing) and managing your taxes.

Rebalancing is important because by the time you’ve invested your portfolio according to your target allocation, the markets have likely moved. By rebalancing, you incrementally sell assets that went up and buy assets that went down in order to move portfolio weights to match your target allocation. Rebalancing can be done at the asset allocation level as well as the individual security level. Proper rebalancing can increase annual return by up to 0.4%.3

• Making sure you invest in tax-efficient vehicles (tax efficiency)

• Deciding which accounts to make investments in (asset location)

• Making sure you manage capital gains and capital losses to lower your bill (tax loss harvesting)

You have a fair amount of control in legally minimizing your taxes. You can do it in three ways:

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STOCK OPTIONS & EQUITY COMPENSATION

A stock option is the right to buy a specific number of shares of company stock at a pre-set price, known as the “exercise” or “strike price.” There are two major types.

Incentive stock options (ISOs): Can only be granted to employees and have more favorable tax treatment.

Non-qualified stock options (NSOs): Can be granted to anyone and tend to be used by public companies.

RSAs are grants of company stock issued to employees in the form of rights to shares of stock that cannot be transferred until the shares vest.

RSUs are the same, but issued in the form of units which correspond in number and value to shares of stock that you receive when they vest. RSU holders are not con-sidered shareholders before the RSUs vest, and do not have voting rights.

For computer-related industries, the majority of employ-ees are owners of the company – much more than the 36% that’s standard for all companies.4

There are a variety of forms in which you can receive your equity compensation. The most common are stock options (incentive or non-statutory) or restricted stock (RSUs or RSAs). If you have stock options, you need to keep tabs on:

• When you can exercise. Your options will have a vest-ing schedule, meaning you only gain access to them over time. They also expire over time.

• How you can exercise. There are different strategies to exercise options, ranging from exercising early and often (a variant of that is the “cashless exercise”) to waiting to exercise and then selling immediately.

• Tax implications. For NSOs, you have ordinary income tax at exercise and for ISOs you may owe AMT tax. If you can afford to wait to hit certain milestones, your tax treatment will be better. Taxes are very important, but are not necessarily the top priority.

If you have restricted stock, you should also keep tabs on vesting, but you have fewer decisions to make. Restricted stock is taxed upon vesting at ordinary income rates. And because you receive your shares outright, you only need to think about your sell-down strategy.

In whatever form you received your stock, the next con-sideration is the same: Now that you own a bunch of your employer’s stock, what do you do?

The answer, of course, depends on your goals and risk tolerance. Generally, you need to consider the risk of

holding a concentrated position in any single stock (that is, the risk of a sharp decline in price). Newly public stocks are particularly risky. Since 1970, new IPOs have under-performed the market by an average of 6.5% per year over their first two years.5 For most people, it’s prudent to design a sell-down strategy that gets you into a well-di-versified portfolio.

TYPES OF STOCK OPTIONS

TYPES OF RESTRICTED STOCK

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Congratulations! In working through this information, you now have a good framework for getting on a solid path to financial health. And you’re ready to make the most of Personal Capital’s award-winning technology and financial tools.

15

When Personal Capital talks, people should listen.

The best, free finance app available.

Personal Capital is the smart way for people to understand, manage

and grow their net worth. Award-winning online tools provide total

transparency into investment accounts. Licensed Personal Capital

advisors then use this information to provide accurate recommendations

to clients, improving efficiency and supporting money management

principles that lead to the best outcomes possible. A pioneer in digital

financial advisory services, Personal Capital is backed by leading Silicon

Valley venture capital firms and financial institutions. These include Corsair

Capital, BlackRock, USAA, Crosslink Capital, Institutional Venture Partners

and Venrock. With nearly $2 billion in assets under management, Personal

Capital helps clients feel more confident about their financial future. The

free app is available for iPhone, iPad, Android, and now Apple Watch.

WEALTH MANAGEMENT REDESIGNED

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ADDITIONAL RESOURCES

This guide and all data are for informational purposes only and do not constitute a recommendation to buy or sell securities. You should not rely on this information as the primary basis of your investment, financial, or tax planning decisions. You should consult your legal or tax professional regarding your specific situation. Third-party data is obtained from sources believed to be reliable. However, PCAC cannot guarantee that data’s currency, accuracy, timeliness, completeness or fitness for any particular purpose. Certain sections of this commentary may contain forward-looking statements that are based on our reasonable expectations, estimate, projections and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not a guarantee of future return, nor is it necessarily indicative of future performance. Keep in mind that investing involves risk. The value of your investment will fluctuate over time, and you may gain or lose money.

1. Fast Facts & Figures About Social Security 2015

2. Determinants of Portfolio Performance by Gary P. Brinson, L. Randolph Hood, and Gilbert L. Beebower, Financial Analysts Journal (1986)

3. Data sources: Ibbotson Associates, MSCI, Standard & Poor’s, World Gold Council, BP.com, US Energy Information Administration, Robert Shiller Online, MIT Center For Real Estate and Yahoo Finance. Calculations are based on historical performance of asset class proxies: S&P 500, MSCI EAFE until 2000 and MSCI ACWI ex-US post 2000, 10 Year U.S. Treasuries, 10 Year Foreign Government Bonds, and 30 Day T-Bills. The alternative asset class is represented by a hypothetical index of 50% real estate and a 50% gold/oil combination.

4. A Brief Overview of Employee Ownership in the U.S. National Center for Employee Ownership (2013) Public Companies with Broad-Based Stock Options National Center for Employee Ownership (1998)

5. Returns on IPOs During the Five Years After Issuing, for IPOs from 1970-2011 by University of Florida Professor of Finance and IPO expert Jay Ritter (2013)

Disclaimer Endnotes

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• The AARP Retirement Survival Guide

• The Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall Street by Justin Fox

• Risk-Return Analysis: The Theory and Practice of Rational Investing (Volume One) by Harry Markowitz

• Common Sense on Mutual Funds by John Bogle

Books

FINANCIAL PLANNING

The Average 401k Balance by Age

Four Steps to a Better Retirement

Stock Options or RSUs? Your Equity Compensation Primer

When Can You Withdraw From Your 401k or IRA Penalty Free?

When to Start Taking Social Security

INVESTING AND PORTFOLIO ALLOCATION

Successful Asset Allocation

Asset Classes 101 – The Building Blocks of Your Portfolio

Seven Deadly Investor Sins

The Dangers of Too Much Cash

The Benefit of Alternatives

FUND AND VEHICLE OPTIONS

Understanding Investment Fees

The Full Cost of Mutual Funds

ETF (Exchange Traded Funds) Basics

Target Date Fund Basics

Blog Posts

www.personalcapital.com

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