ASSET ALLOCATION AND RETIREMENT PLANNING MODEL
Review: 5 - "A masterpiece of literature" by , written on May 4, 2006
I really enjoyed this book. It captures the essential challenge people face as they try make sense of their lives and grow to adulthood.

ASSET ALLOCATION AND RETIREMENT PLANNING MODEL

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This fully editable model helps finalise a sound investment strategy to meet the ultimate goal of a stress-free life in retirement, while suggesting specific investments you can directly execute through your home banking, saving money on fees. 


This is primarily achieved by:

• establishing an adequate asset allocation methodology based on age and current net worth;

• projecting your current saving capacity, estimating how earnings, operating and capital expenditures will evolve during your lifespan, using built-in assumptions;

For this purpose, the model uses a set of built-in assumptions:

• average return of equities, bonds and real estate portfolios, based on last 10 years performance of relevant benchmark indexes;

• expected inflation development, based on last 10 years history;

• age at which earnings and expenses are expected to peak (based on broad statistical data);

• estimated evolution of capital expenditures (calculated by default, if no specific input provided)

• estimated capital gains tax (average based on country of investor);

• estimated life expectancy

Financial projections also available on net present value basis.

The allocation process:

1.determining investable assets

2.creation of emergency fund (kept in checking and savings accounts) equal to your annual expenses plus a proportional margin

3.determining expected cash requirements for next 5 years, to be invested in safer instruments with maturities matching your future disbursements

4.allocation of remaining funds to higher-risk instruments (Equities, Bonds, Real Estate)

Altogether, the model incorporates 3 key functionalities, each one generating a specific asset allocation proposal:

• PORTFOLIO STRUCTURING (main feature, full asset allocation)

• LUMP-SUM INVESTMENT (excess liquidity invested all in one go)

• ACCUMULATION PLAN (younger people, lower net worth, periodically investing the same amount)

For private investors, fees paid to banks and mutual funds managers can significantly impact portfolio performance. To build a well diversified portfolio keeping costs down the model assumes majority of investments in Exchange Traded Funds (ETFs).

PORTFOLIO REBALANCING

Rebalancing is the process of realigning the weightings of an asset portfolio, involving periodically buying or selling assets to maintain an original or desired level of asset allocation or risk. For example, say an original target asset allocation was 50% stocks and 50% bonds. If the stocks performed well during the period, it could have increased the stock weighting of the portfolio to 70%. The investor may then decide to sell some stocks and buy bonds to get the portfolio back to the original target allocation of 50/50. Rebalancing gives investors the opportunity to sell high and buy low, taking the gains from high-performing investments and reinvesting them in areas that have not yet experienced such notable growth or that are generating losses.

Rebalancing is highly recommended at least once a year, but not too often, to keep your transaction costs down. It can be handled using our "Portfolio Rebalancing Tool", sold separately as an ideal complement to this product.

ASSET CORRELATION

Correlation statistically measures the degree of relationship between two variables in terms of a correlation coefficient that lies anywhere between +1.0 and -1.0. When it comes to diversified portfolios, correlation represents the degree of relationship between price (returns) movements of different assets included in the portfolio. A correlation of +1.0 means prices (returns) move totally in tandem (perfect positive correlation); a correlation of -1.0 means that prices (returns) move in completely opposite directions (perfect negative correlation). A correlation of 0 means the movement of one asset has no effect on the movement of the other asset. A well diversified portfolio should include uncorrelated or inversely correlated assets. Our "Asset Correlation model" is separately available, as a useful compendium to this product.

For full explanation of terminology used and model specifics, please refer to the Glossary sheet.

This fully editable model helps finalise a sound investment strategy to meet the ultimate goal of a stress-free life in retirement, while suggesting specific investments you can directly execute through your home banking, saving money on fees. 


This is primarily achieved by:

• establishing an adequate asset allocation methodology based on age and current net worth;

• projecting your current saving capacity, estimating how earnings, operating and capital expenditures will evolve during your lifespan, using built-in assumptions;

For this purpose, the model uses a set of built-in assumptions:

• average return of equities, bonds and real estate portfolios, based on last 10 years performance of relevant benchmark indexes;

• expected inflation development, based on last 10 years history;

• age at which earnings and expenses are expected to peak (based on broad statistical data);

• estimated evolution of capital expenditures (calculated by default, if no specific input provided)

• estimated capital gains tax (average based on country of investor);

• estimated life expectancy

Financial projections also available on net present value basis.

The allocation process:

1.determining investable assets

2.creation of emergency fund (kept in checking and savings accounts) equal to your annual expenses plus a proportional margin

3.determining expected cash requirements for next 5 years, to be invested in safer instruments with maturities matching your future disbursements

4.allocation of remaining funds to higher-risk instruments (Equities, Bonds, Real Estate)

Altogether, the model incorporates 3 key functionalities, each one generating a specific asset allocation proposal:

• PORTFOLIO STRUCTURING (main feature, full asset allocation)

• LUMP-SUM INVESTMENT (excess liquidity invested all in one go)

• ACCUMULATION PLAN (younger people, lower net worth, periodically investing the same amount)

For private investors, fees paid to banks and mutual funds managers can significantly impact portfolio performance. To build a well diversified portfolio keeping costs down the model assumes majority of investments in Exchange Traded Funds (ETFs).

PORTFOLIO REBALANCING

Rebalancing is the process of realigning the weightings of an asset portfolio, involving periodically buying or selling assets to maintain an original or desired level of asset allocation or risk. For example, say an original target asset allocation was 50% stocks and 50% bonds. If the stocks performed well during the period, it could have increased the stock weighting of the portfolio to 70%. The investor may then decide to sell some stocks and buy bonds to get the portfolio back to the original target allocation of 50/50. Rebalancing gives investors the opportunity to sell high and buy low, taking the gains from high-performing investments and reinvesting them in areas that have not yet experienced such notable growth or that are generating losses.

Rebalancing is highly recommended at least once a year, but not too often, to keep your transaction costs down. It can be handled using our "Portfolio Rebalancing Tool", sold separately as an ideal complement to this product.

ASSET CORRELATION

Correlation statistically measures the degree of relationship between two variables in terms of a correlation coefficient that lies anywhere between +1.0 and -1.0. When it comes to diversified portfolios, correlation represents the degree of relationship between price (returns) movements of different assets included in the portfolio. A correlation of +1.0 means prices (returns) move totally in tandem (perfect positive correlation); a correlation of -1.0 means that prices (returns) move in completely opposite directions (perfect negative correlation). A correlation of 0 means the movement of one asset has no effect on the movement of the other asset. A well diversified portfolio should include uncorrelated or inversely correlated assets. Our "Asset Correlation model" is separately available, as a useful compendium to this product.

For full explanation of terminology used and model specifics, please refer to the Glossary sheet.

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