1) The document discusses volatility, interest rates, and taxes based on a note from Frank Pape, Director of Consulting at Russell Investments. 2) Volatility has been low recently but may pick up again as concerns arise. Low interest rates have helped the US economy but rates are expected to gradually rise starting in mid-2015. 3) Taxes can significantly reduce long-term returns through tax drag. Being tax-aware and using strategies like tax-loss harvesting can help minimize taxes and improve after-tax returns.

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HELPING INVESTORS
DECEMBER 2014
The lowdown on volatility,
interest rates and taxes.
PLUS A QUICK LOOK BACK AT 2014.
by Frank Pape, Director of Consulting

2. Russell Investments // Helping investors // Consider this
From the author.
You may not realize it, but 2014 has been a very solid year for the equity
markets. As of November 28, 2014, the broad-based Russell 3000® Index
has returned over 12.5% year-to-date. It’s worth mentioning that this strong
performance comes in spite of global worries about instability in the Middle
East, an Ebola outbreak in western Africa and unrest in the Ukraine.
There were also fears—and still are—about the strength of the European
economic recovery, rising interest rates, and volatility in the U.S. equity
and Treasury markets. Even though it was not a straight line up (it rarely is),
none of these concerns were enough to hold back the continued rise of the
U.S. equity market.
I thought it would be helpful to take a closer look at a couple of those topics
that investors seem to be concerned about: volatility and interest rates.
Both are hovering near historic lows. Then we’ll wrap things up by talking
about one of my favorite topics—taxes—which are not exactly low but likely
poised to move higher for many investors.
Frank Pape
Director of Consulting

3. Russell Investments // Helping investors // Consider this
Volatility. What is it, where is it,
and what does it mean to you?
For the last several years, volatility (the bumpiness of the stock market) has
been remarkably low.* Yet every quarter we survey financial advisors and they
tell us that their clients bring up the topic all the time. In fact, it has been one of
the top conversations clients initiate for years now. And very recently advisors
have started to bring up the subject, too. So I thought it would be helpful to
put the concept of market volatility in some context. My hope is that you won’t
spend too much time worrying about it, because it’s beyond our control. And
as we’ll discuss, a well constructed diversified portfolio should be ready for it
when it picks back up.
Volatility is simply the up and down swings in a market over a period of time.
In times of increased uncertainty, the swings become more pronounced as
volatility rises. Conversely, during calmer, more stable times, volatility is low.
The chart below gives us some idea about how volatility can move over several
decades. The high point (and highest point of uncertainty) during the last
25 years can be seen around December 2008 when volatility crested in the
aftermath of the Financial Crisis and that uncertainty eventually led to the low
point for the U.S. equity market in March 2009. It’s right around this time that
the recovery from the Great Recession began.
Volatility is low right now.
As you can see, volatility is actually very low right now. What’s more, the
spike in volatility for October 2014 did not last long, even though it seemed
quite dramatic versus the long period of calm we had been experiencing since
2011. For the month, October had 13 days where the equity market (Russell
3000 Index) moved up or down by more than 1%. Compare that to the first
nine months of 2014 where the markets had only 13 days of plus or minus
Volatility is simply the
up and down swings in
a market over a period
of time.
* From August 2012 (15.69) through
November 2014 (13.35), the month-end
average of volatility as measured by the
CBOE VIX S&P 500 Index has traded
below its historical range.
Data shown is historical and is not an indicator of future results.
Near-termvolatilityindex(%)
CBOE Volatility Index® (VIX) Jan. 1990 – Nov. 2014
0
10
20
30
40
50
60
70
80
90
1997
1996
1994
1993
1991
1990
2005
2003
2002
2000
1999
2012
2011
2014
2009
2008
2006
13.35
+/- 1 Standard deviation of CBOE S&P 500
Volatility Index figures fall into this range.
Current

4. Russell Investments // Helping investors // Consider this
Inflation remains
subdued, standing at
just 1.7% at the end
of September.
1% moves. That concentrated volatility we experienced in October led many
investors to question the strength of the market, yet the Russell 3000 Index
continued to climb, finishing up 2.8% for October alone.
As I mentioned earlier, there were plenty of things for investors to fret about
in October—from growth worries in Europe, China and Japan to the Ebola
outbreak and unrest in the Middle East. You may have heard the expression
that the markets often “climb a wall of worry.” It was certainly true in October,
but it wouldn’t surprise us to see volatility pick up again as different concerns—
or the same old ones—rise to the surface. The thing for all of us to remember
is that the market’s ups and downs are part of the process. So be ready for
it and try not to fear it. A well thought-out investment plan combined with a
globally diversified portfolio can go a long way to help you stay the course
when the markets get bumpy. As always, your financial advisor can help you
every step of the way.
Low interest rates and the
U.S. economy.
We just covered low volatility, so let’s move on to low interest rates and what
it all means for investors like you and me. First of all, I don’t think anyone
would have predicted that interest rates would stay so low for so long, but
they have. Consider this: the yield on the 10-year U.S. Treasury has declined
nearly 28% year-to-date. It’s currently yielding 2.26% as I write this on
12/4/14, and it started the year yielding 3.0%. At that time, many thought that
yields would be steadily rising by now. But that hasn’t happened—yet.
Coming out of the Financial Crisis and Great Recession of 2008 and 2009, the
Federal Reserve made a commitment to keep interest rates low in the hopes
of stimulating job growth and getting the economy moving again. It’s safe to
say that all this has taken longer than they’d hoped, but in the U.S. there are
definite signs that the economy and the employment situation are improving.
Unemployment, for example, dropped below 6% (to 5.9%) in September
for the first time since July 2008. In October, it edged even lower to 5.8%
according the U.S. Bureau of Labor Statistics.1 There are other employment
numbers that may not be as positive (participation ratio, underemployed
ratio, etc.), but it’s clear the general trend is improving. Inflation also remains
subdued, standing at just 1.7% at the end of September. The economy is also
growing at a healthy rate, 3.5% as measured by U.S. Gross Domestic Product.
And credit lending is expanding at a reasonable level, with 30-year mortgage
rates falling below 4.0%.2
These are a lot of numbers to digest, I know. But the main takeaway is that
these are all generally good signs for the U.S. economy. All this leads Russell’s
strategists to believe that the Federal Reserve will look to increase short-term
interest rates (gradually) by mid-2015, barring any major shocks to the global
economy. Going forward, we think it’s prudent to have moderate expectations
for the equity markets looking out over the next year or so. And that’s very
good considering how far we’ve come since the Financial Crisis.
1 http://www.bls.gov/news.release/empsit.
nr0.htm
2 http://abcnews.go.com/Business/
wireStory/us-30-year-mortgage-rates-
drop-399-percent-27055821

5. Russell Investments // Helping investors // Consider this
Investors can give up
a lot of their returns
to taxes without even
realizing it.
Taxes are a drag, but being
tax-aware can help.
I talk about taxes a lot when I meet with advisors and their clients. Most want
to know if they are doing all they can to manage the tax hit they take each
year. In most cases, they could probably be doing more.
Tax-aware investing is one way to be more thoughtful about your tax situation.
Surprisingly, it is not necessarily about lowering your taxes, but actually
seeking to build your wealth through higher after-tax returns. Let me explain.
We analyzed the average annual impact of taxes over the last 10 years
ending September 30, 2014, on Morningstar U.S. equity mutual fund data.†
This included both actively-managed and passively-managed (i.e. index and
exchange-traded) products across market cap sizes and styles. We used
a 10-year time frame in order to reduce the impact of the 2008 downturn,
which has made many equity funds appear tax-efficient in the past five years
when, in reality, they were simply working off capital losses they accumulated
in 2008.
What we learned is that investors can give up a lot of their returns to taxes
without even realizing it. How much? For the 10 years ending September
2014: The average U.S. equity mutual fund† surrendered 0.92% of its return
to taxes each year. We call that tax drag, and that amount can really add up
over the years of investing. I know that 0.92% may not sound like a lot, but
consider the impact over time. Let’s look at U.S. stocks (Russell 3000 Index)
over the last 10 years where they’ve increased 8.3% each year or 122%
cumulatively. (As of Nov. 28, 2014.)
I don’t care how rich you might be, $182,000 is a lot of money. If you can
dial down this tax drag , you will be able to also dial down the amount lost to
taxes and work to have higher after-tax wealth. But that’s not all. Recall that
tax rates increased for many taxpayers last year in addition to the new tax on
investment income for many.
The bottom line is that taxes are rising for many investors, but there are steps
you and your advisor can take to minimize the impact. For taxable accounts,
investing in tax-aware or tax-managed funds can help minimize tax drag.
Additionally, offsetting any capital gains you may have with losses, a practice
called tax-loss harvesting, can also help manage your taxable income in a
given year. Your financial advisor or tax professional can help you reduce tax
drag and guide you along the path to greater tax-awareness.
† Methodology:
The term mutual fund also includes ETFs
as reported by Morningstar.
Included all funds and share classes as
reported by Morningstar.
Sorted dataset by Morningstar Category
Within cap size, calculated statistics on:
Net expense ratio
Pre-tax return
After-tax return (pre-liquidation)
Tax drag (pre-tax less after-tax return)
Growth of $1,000,000 over last 10 years
No taxes $ 2,223,958
With tax headwind of 0.92% per year $ 2,042,129
Wealth lost to taxes $ 181,829
This hypothetical example is for illustration only and is not intended
to reflect the return of any actual investment.

6. Russell Investments // Helping investors // Consider this
Please remember that all investments carry some level of risk, including the potential loss of principal invested. They do not typically grow at an even
rate of return and may experience negative growth. As with any type of portfolio structuring, attempting to reduce risk and increase return could,
at certain times, unintentionally reduce returns. The information contained in this piece should not be considered investment advice to buy/sell any
securities referenced. No investment strategy can guarantee a profit or protect against a loss. These views are subject to change at any time based
upon market or other conditions.
Investing involves risk, principal loss is possible.
Income from funds managed for tax-efficiency may be subject to an alternative minimum tax, and/or any applicable state and local taxes.
Russell 3000® Index: Index measures the performance of the largest 3000 U.S. companies representing approximately 98% of the investable U.S.
equity market.
Volatility Index (VIX): CBOE VIX (Chicago Board Options Exchange Volatility Index) measures annualized implied volatility as conveyed by S&P 500
stock index option prices and is quoted in percentage points per annum. For instance, a VIX value of 15 represents an annualized implied volatility of
15% over the next 30 day period. The VIX measures implied volatility, which is a barometer of investor sentiment and market risk.
Standard Deviation: A statistical measure of the degree to which an individual value in a probability distribution tends to vary from the mean of the
distribution. The greater the degree of dispersion, the greater the risk.
The general information contained in this publication should not be acted upon without obtaining specific legal, tax, and investment advice from a
licensed professional.
Russell Investments is a trade name and registered trademark of Frank Russell Company, a Washington USA corporation, which operates through
subsidiaries worldwide, including Russell Financial Services, Inc., member FINRA
Copyright © Russell Investments 2014. All rights reserved.
First used December 2014
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