One of the parts of modern financial planning for individuals that simply
does not make sense (to me, at least) is that asset allocation is treated as
though there is a generic solution for every person, with choices of allocation
being a function of age and stated risk tolerance, although most people really
have no idea whether their risk tolerance is best matched to an 'aggressive
portfolio' or a 'moderate portfolio.'
This lack of tailoring of investment plans is unfortunate. Still, moving from
generic to tailored solutions is a measure of maturity of most areas of
commerce. In the fifteenth century, there were just a couple of shoe sizes and
left and right shoes Balenciaga were
identical. Thankfully, our shoes are now matched far more closely to the shapes
of individual feet and (hopefully) asset allocation will follow suit.
Jane has $120,000 in her retirement portfolio and plans to contribute $15,000
per year (adjusted up each year to match inflation) to her 401(k) each year,
including her employer match. When Jane retires, she plans to draw $75,000 per
year (in 2005 dollars) from her portfolio. She will adjust that upwards each
year to account for inflation. Jane is saving fairly aggressively at this stage
in her life by comparison to most Americans of the same age. We are going to
look at two allocations and how they might work for Jane. balenciaga bag
sale
In a paper from December of 2005, we looked at a wide range of iShares ETF's
and at the range of performance variables of different members of this fund
family. Based upon that analysis, we have identified a small group of ten ETF's
that have a long history (by ETF standards) and provide the ability to create balenciaga bag a wide
range of lowcost portfolios with nicely optimized riskreturn balances:
If you are interested in building a portfolio that exploits strategic
diversification effects but you do not want to invest the time to investigate
individuals companies or stocks, you could do a lot worse than starting with
this small selection of investment options.
Rather than looking at recent historical values for risk and return, we
project forward using the Quantext Portfolio Planner (QPP), a Monte Carlo
simulation tool. QPP takes both fairly recent market history (three years in
this case), combined with the longterm balance of risk and return in the stock
and bond markets and http://www.balenciagatop.com/ the assumed
future performance of the S as a whole, and generates projections for risk and
return. QPP includes fund fees and assumes reinvestment of all dividends. When
we calculate projected future values for these ETF's using QPP we obtain the
following:
This portfolio has a projected future return of 9.83% per year, with a
standard deviation of 12.68% per year. This means that this portfolio is
projected to have less future volatility than the S (recall that this is
projected at 15.07%) and a higher return. This portfolio has performed very well
over the past three years (shown aboveHistorical Data), but note that we are
projecting a future annual return that is less than half of this level (9.83%
vs. 19.59%). This portfolio, while it can be improved, looks pretty good. This
is not accidental and you would not get portfolio diversification effects nearly
this good if you start with just any random selection of ETF's. To get a better
understanding of why we feel that this is a good 'small universe' to start from,
read the previous paper cited above.
Now, even though this portfolio takes good advantage of diversification
effects, is it right for Jane? This is where the issue of personalization comes
in. What does a standard deviation of 12.68% per year, with average return of
9.8% per year mean for Jane? We can be pretty happy with the projected average
return, but is this risk level a lot or a little. An easy way to examine this is
to look at short and medium term projections for the portfoliothese make a
portfolio feel much more concrete. QPP allows the user to specify a time horizon
and then look at the probability of sustaining a certain level of loss. We took
a look at a 90 (calendar) day projection and got the following:
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