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mixed portfolio volatility assumptions?
Old 12-06-2010, 09:30 PM   #1
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mixed portfolio volatility assumptions?

People who plug in their own asset allocation presumably have already picked a portfolio volatility. But it would be nice to have the program calculate its own number to verify it is treating the inputs as the user presumes.

Also be nice to ask it to give you a volatility range by making the optimum changes to the allocations which the user has input -- ie it would fine tune or re-balance the input portfolio.
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Old 12-07-2010, 12:31 AM   #2
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I just did a run using Random Performance with a return of 7.5%, SD 15% and inflation 5%, to get a 2.5% overall growth rate.

The scenario has retirement starting in 13 years. The earliest failure is in about year 20. Eyeballing it seems to show a 50% chance of lasting at least to year 25, but almost 100% failure by year 30. Wish the program would actually give that data.

So somehow we need to evaluate the chance of the "new normal" reverting to "historical normal" in time to reverse the failure...

If we knew the portfolio value at whatever year the "historical normal" began again...

So can it be modified to change the market yield inputs in a given year?

From there it is trivial to allow numerous changes...
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Old 12-07-2010, 12:57 AM   #3
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OK, I changed the input to 6.5% yield and 5% SD to simulate everything in bonds. That shows failure between about year 24 and 30. But the decline didn't start until the end of year 20.

There needs to be a horizontal line showing your starting money; this is hard to interpolate...

The worst loss is pretty much a horizontal line at about 27%.

So I could re-run starting in the year of the 'return to normalcy' using 83% of my actual money and see if it recovers or not. At least, by how much it delays the failure date.
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Old 12-07-2010, 01:07 AM   #4
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OK, for the next 18 years there is 46% failure with Mixed, and 30% with a 65% stock : 35% 5 YR Treas.

Just to finish my example. So if there is a 20 year "generational long" New Normal of poor returns, there is a significant risk of failure even if you act 100% defensively now.

And of course I should run the 100% Defense numbers from the start, to see how long I have to recognize normal markets & switch over to prevent failure from low growth...

This is very interesting.
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Old 12-07-2010, 01:15 AM   #5
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Wow. 100% 30Yr Treas and 5% inflation worked 100% and I still have half my initial money under the mattress when I croak.

This is too easy... I must be doing something wrong, or Firecalc is making some bad assumptions about something...
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