On our mission to inform investors and advisors for the investor’s investment planning and selection, diversification ideas from Markowitz and Bogle take us much of the way. From an ocean of tens of thousands of stocks and funds and other places to bet the money, those diversification ideas have screened investment candidates down to a range of diversified mixes of asset classes, each with estimated return-rate arithmetic mean and standard deviation.
We apply those best-diversified portfolios’ return-rate means and standard deviations to assess and compare those portfolios for the investor’s purpose, her future dollar goals!
With Monte Carlo simulation we use those technical specs to apply each portfolio’s return-rate probabilities to the investor’s dollar plan, with compounding along the way, to assess each portfolio in result probabilities for the investor’s dollar goals.
With portfolio-comparison graphs we present results of these analyses to show the investor, and arm the advisor to show investors, the answers they need to see for informed judgment of best portfolios for the investor’s plan, goals, and priorities:
Q1: Of the portfolios along the range, which portfolios offer best probabilities for meeting my goals?
For this question, we show the investor a Goal Frontier graph for her particular plan and goals:
Q2: Of the best portfolios in probability of meeting my goals, how do they compare in how far above or below my goals the results may be?
For this, we show her any two of the best portfolios compared in range of probabilities for what the final dollar-value result may be:
Q3: Of the best portfolios in probability of meeting my goals, how do they compare in probabilities for value year by year along the way?
For this we show the investor a graph comparing any two of the best portfolios in probabilities for value at the end of each year through the life of her plan:
Q4: Of the portfolios that are best in probabilities of meeing my goals, how do they compare in how big the ups and downs along the way may be?
For this, we show the investor a graph on which, for any one of the best portfolios or comparison of any two, she can see samples of the year-by-year path of portfolio value through the years of her plan.
She can see as many samples as she wants, but it’s best to view just a few at the time so the ups and downs of individual samples are easy to see.
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It isn’t just for investment selection that this is the kind of guidance individual investors need. Investment planning involves other key decisions that depend on assessment of the dollar plan for the investor’s dollar goals.