Measuring Your Risk Index
Most people we meet fall into two categories – they are discontented with their current investment strategy, but are not sure why. Or, they are content, but really have no idea how their portfolio is really constructed.
We have developed a measuring tool that will help you determine whether your current investment program is really working for you the way it should. We call it our BJIA Investment Policy Analysis (IPA).
What is your IPA Methodology?
Every portfolio can be segmented into submarkets of risk. Whether you know it or not, your portfolio probably has 10-12 submarkets built into it. The question is, are they constructed properly and are they balanced to achieve the lowest level of volatility for the amount of risk you are willing to endure.
Step 1. Measure your sub markets. We will deconstruct your portfolio and determine what percentage of your portfolio is attributed to what sub market. This allows us to see how your total portfolio is built and ultimately determine how much risk you are buying.
Step 2. Create an historical proxy for your portfolio. Most accounts have a significant number of mutual funds or stocks. These stocks may or may not have a long track record of measurable performance. But as a submarket, they do. There are numerous proxies (indices that perform like your stock) that can be used to measure what your portfolio would have done over long periods of time.
Step 3. Measure the average rate of return, IRR and standard deviation of risk for your portfolio. By combining the proxies in the same proportion as your current portfolio, we are able to demonstrate how your portfolio would have performed over the last 35 years. We know what the historic returns would have been and how much risk you had to buy to get it. Although this is purely hypothetical, it provides an interesting way for you to see how your portfolio stacks up.
Step 4. Determine your financial goal. Most people are interested in knowing how much income their portfolio will produce when they convert from accumulator to distributor. When you begin to pull income from your portfolio, how much and for how long? Those are the key questions. We use a very sophisticated probability analysis technique called Monte Carlo to tell us what you might expect from your proxy portfolio, and what the probability is of your having sufficient funds to meet your goals.
Market performance is totally random. But the past is often prologue. So by taking all of the historic returns we know, and assuming 1,000 different combinations of returns, we are able to estimate with a given confidence level (typically 90%) the probability your portfolio has of providing you with your desired income for the longest period of time.
Step 5. Once we establish a benchmark for measuring alternatives, we are then able to look at how some of the most recent research, if utilized on your portfolio could reduce risk and improve return. Again, using the Monte Carlo simulation, we are able to demonstrate how a lower risk will increase the chances of your money lasting as long as you do.
Obviously, this is all hypothetical. It is all based on simulation, but Past is Prologue. Markets have performed over long periods of time at the same returns. If you look at history you will see an example of how incredibly level the returns have been dating back to 1926.
If you would like to have a Risk Analysis performed on your portfolio, fill out the risk tolerance questionnaire. Then send us your current statement from your brokerage account. We will then do our proxy analysis and provide you with a benchmark study.