Asset Allocation and Retirement Planning Model

ASSET ALLOCATION MODEL WITH REALISTIC PROJECTIONS OF FINANCIAL SITUATION AT RETIREMENT AND RESOURCES NEEDED FROM THEN ON.

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This model – supporting up to 18 different currencies – helps finalize a sound investment strategy to meet the ultimate goal of a stress-free life in retirement, while suggesting specific investments you can execute directly through your home banking, saving money on commissions and 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 might evolve during your lifespan.

The model uses a set of built-in assumptions:
• expected yield of equity, bonds, and real estate portfolios, based on the last 10 years average performance of relevant indexes;
• expected inflation development, based on the last 20 years;
• age at which earnings and expenses are expected to peak (based on broad statistical data);
• estimated evolution of capital expenditures (calculated by default);
• estimated life expectancy.

All of which integrated with a few information provided by you: annual net income, monthly savings, expected retirement age, desired lifestyle after retirement, the estimated level of retirement income as a percentage of earnings at retirement, current net worth. Plus investments you expect to make over the next 5 years (estimate should be accurate for best asset allocation results) and over the following decades (if the latter is missing default values will be used).

The model consists of 9 spreadsheets:
1. glossary with an explanation of financial terms
2. data input and asset allocation summary, with financial projections
3. assumptions (including input fields for future investments after year 5, if left blank default values apply)
4. detailed asset allocation report (in printable format)
5. suggested investments
6. portfolio rebalancing (recommended annually)
7. calculation engine
8. asset allocation database
9. indexes historical data

Altogether the model incorporates 5 key functionalities, the first three directly related to the asset allocation process:
1. PORTFOLIO STRUCTURING
2. LUMP-SUM INVESTMENT
3. ACCUMULATION PLAN
4. FINANCIAL PROJECTIONS
5. PORTFOLIO REBALANCING

PORTFOLIO STRUCTURING
Used to create the most adequate asset allocation based on set parameters, building a well-diversified and risk-balanced investment portfolio. The automated allocation process being as follows:
• determination of investable assets, by subtracting home value and illiquid assets from your current net worth;
• creation of an emergency fund (to be kept in checking and savings accounts) equal to your annual expenses plus a proportional margin to rebalance your investment portfolio should you need to inject extra cash in order to keep the original weightings;
• determination of your expected cash requirements over the next 5 years, funds to be invested in safer instruments with maturities matching your future disbursements;
• allocation of the remaining funds to higher-risk instruments (Equities, Bonds, Real Estate).

LUMP-SUM INVESTMENT
Investment of extra liquidity all in one go. By entering the amount and desired time horizon the model will calculate the corresponding future value, both nominal and inflation-adjusted, proposing a suitable asset allocation. Being an independent exercise, this will not trigger retirement calculations and projections.

ACCUMULATION PLAN
The strategy also is known as dollar-cost averaging, by which an investor regularly makes contributions of a small fixed amount into a mutual fund or ETF portfolio. A voluntary accumulation plan is particularly appropriate for younger and inexperienced investors with little cash on hand, who can take time to build their investment. What’s more, spreading the investment over time in fixed amounts offers the benefits of cost averaging, buying more shares when prices are low and fewer shares when prices are high. By entering an amount, time horizon, and frequency of contribution, the model calculates the future value, proposing an allocation to a balanced ETF or mutual fund (at least 60% equity).

FINANCIAL PROJECTIONS
At the top of the input sheet, there’s a window showing financial projections from data entered, applied – depending on the function used – either to the selected time horizon or the expected lifespan. In the case of Portfolio Structuring, it will show the estimated liquidity at retirement and the amount needed from then on, determining liquidity deficit/surplus plus legacy net worth, including the value of real estate owned adjusted for inflation. In the case of a lump-sum investment or accumulation plan, it will show the future value for the selected time horizon. Numbers can be displayed in nominal terms or inflation-adjusted, using the drop-down window at the top. Projections assume holding investments according to the proposed asset allocation plan, with annual portfolio rebalancing.

LIQUIDITY DEFICIT
It means available resources will not be sufficient to support your financial needs in retirement. See how dramatically the situation improves if you increase the amount of your monthly savings. The younger you are, the more you will benefit from the power of compounding.

PORTFOLIO REBALANCING
Rebalancing is the process of realigning the weightings of an asset portfolio. Rebalancing involves 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. In case of a market shock, with generalized loss of value across portfolios, rebalancing might involve taking losses, unless additional cash is injected to restore portfolio amount and weightings to the original size. Rebalancing is highly recommended at least once a year (typically, start of the new year), but not too often, to keep your transaction costs down. It can be handled using the dedicated spreadsheet included in the model, which specifies how much to buy or sell for each given instrument.

PROPOSED INVESTMENTS STRUCTURE
For private investors, fees and commissions paid to banks and mutual funds managers can significantly impact portfolio performance. To build a cost-efficient and well-diversified portfolio the model proposes investing directly in Exchange Traded Funds (ETF), except for Corporate Bonds, where picking individual issuers is the preferred option.
For further information and explanations of terms and definitions please refer to the Glossary sheet.

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