The Bank of Dad has written a piece of software with the working title of "Investment Analyzer". It is going to be posted as a zip file you can download and try out. It is currently only a beta version, so is being distributed as freeware. You can download and try it, but please let me know if you do. The email address is below. Please do not distribute it to others without asking them to contact me and let me know they have it.
I am looking for feedback so I can make improvements to it. If it seems like something people will want, I'll change it to a shareware product and start charging people something like $5. Or a beer. Or a chocolate truffle. Or an extra $5 donation to your favourite charity while thinking fondly of the Bank of Dad.
The Investment Analyzer has two functions. a) It can analyze a group of funds and their returns history and develop a set of optimized mixtures with the lowest year-to-year variability for a given average rate of return. b) It can analyze a portfolio of investments and a range of retirement expenditure plans and estimate the probability the investor will outlive his/her money.
When I started investing, I learned that asset allocation and diversification were important parts of investing success, but that there was something called "false diversification" that could trip up an investor. False diversification is where you split your money between two funds that basically behave the same way. You think you are lowering your risk by spreading your money between different things, but actually you are making no difference at all. I wanted to be able to estimate, based on past results, which of my funds went in different directions from each other and would therefore provide me with useful diversification.
In 1996 I wrote a little piece of code in Pascal, to grind through my collection of mutual funds and try to figure out the best allocation between them for the average rate of return I wanted. I ran it on my computer at work, which was faster than anything we had at home, and it often had to run overnight. Since then I have re-written it twice, because of various computer upgrades, and each time I added more features. The computer I run it on now is over 1000 times as fast as the one in 1996, so it can consider a lot more fund combinations a lot more quickly as it develops its optimized mixtures.
To use it you assemble a little text input file (which you can build in a spreadsheet and export to comma-separated text if you want), with information on the funds you want it to work with, the range of years for which you have returns, and the total return for each year for each fund. You can also specify a couple of target levels of return and standard deviation, like for a low-risk portfolio and a medium-risk portfolio. You can specify the "step sizes" the program will use to mix the funds together. For example, if you specify a step size of 100%, the program will compare only portfolios that consist entirely of one of the funds. If you use a step size of 50%, the program will compare all the portfolios with everything in one fund and also all the portfolios split evenly between two of them. It can use step sizes of 100%, 50%, 25%, 20%, 10%, 5%, 4%, 2%, and 1%. If you specify that it should start with a step size of 100% and move through to a step size of 1%, it will run a pass at every step size in between and each time will use the information it gains to narrow down the choices it needs to consider in the next pass.
Each time it looks at a portfolio mixture, it figures out the total return for each year for the mixture. From that, it calculates the average annual return and the standard deviation of the returns. Then it tries to store these results in a bin for the best portfolio with approximately this rate of return. If this is the first portfolio with this rate of return, the program plops it in that bin. If there is already a portfolio stored in that bin, the program compares the standard deviations. If the new one has a lower standard deviation, it replaces the portfolio that was already stored in the bin. Otherwise, the program moves on to the next mixture.
At the end, it can draw a chart that shows the best standard deviation available for each rate of return, and the fund mixture that produced that standard deviation. You can pick a place on the chart that represents the rate of return/standard deviation you want and read off the mixture of funds that would have produced thos results based on the returns history. Of course, past performance does not predict future results. You don't know what the market conditions will be going forward, so you can't predict which of your funds will do well. But the relationship between them, in terms of which ones go up when another one goes down, is probably more predictable.
Over the years I've used spreadsheets to track our investments and often done some kind of simple calculation in the spreadsheet to forecast whether our funds would grow enough to pay for our retirement. A few years ago, I wrote a VBA macro that would cycle through a range of retirement ages and a few different retirement spending levels and, for each combination, estimate the probability that we would outlive our money. It used the average return and standard deviation for the overall portfolio to generate the return for each year, combined that with the planned contribution or withdrawal, and repeated this for each year until our estimated year of expiry. Then it repeated that whole process 999 more times, tallied up the results and calculated the percentage of time we ran out of money in 1000 trials. Then it repeated the same process for the next combination of retirement age and retirement spending level. This is called stochastic simulation, or the Monte Carlo approach.
I have now rewritten this and added it to the same program as the mixture optimization system. To use it, you again assemble a little text input file (again, you can do that in a spreadsheet and export it to comma-separated text if you want), with information on the investments you have in your portfolio and their historical returns, how much you plan to contribute each year until you retire, the pensions you expect to get from company or government sources and when you will start getting them, when you plan to retire, what you think your spending pattern might be in retirement, the inflation rate, the tax rate you expect to pay in retirement, and so on. Then it runs through 1000 trials for each scenario and reports the results in a chart. It runs about 1200 times as fast as it does in the spreadsheet macro, so if you want to use more trials you can do so. 1000 seems adequate for me.
Because my parents are already retired and I wanted to be able to assess their situation, I added the capability of running the stochastic model for someone who is already retired. It works the same way, but instead of a range of retirement ages to consider, you enter the range of ages you might live to, to test the probability of running out of money before that age.
There are various on-line programs for doing something very similar to this. They allow you to experiment with various things, such as when you start your Canada Pension Plan or Old Age Security payments (the monthly payment for each of those is higher if you delay starting it after the "normal" retirement age), what age you will retire, how much you plan to contribute, how much you think you might spend in retirement, and how long you think you might live. There were always aspects of my situation that didn't fit into the on-line calculators, so I wrote my own. For example, we have retirement accounts we established when we lived in the US, and other ones we set up after we moved to Canada. None of the on-line calculators allow you to enter information in two different currencies. My tool does that. It also doesn't limit how many pensions you enter, so if you expect to get CPP and OAS and a company pension, but also Social Security (in US$), you can enter all of that. You can specify whether pensions are taxable or not, whether they are indexed to inflation, and so on. Basically, I built the tool I needed myself, and I'm hoping it might be useful to others.
The file is posted as a zip file, which you download and then unzip. To install it, you run the setup.exe and it should install as an application called Investment Analyzer. It runs in Windows, so if you are an Apple user you would have to run some kind of Windows emulator to use it. I'm not sure how old a version of Windows it will work on. I'm using Windows 10 and haven't tried it on anything else.
There is also a Word file with instructions on how the input files work. It lists all the possible KEYWORD options a line of data can start with, and what the program is expecting to see after each KEYWORD.
There is a directory of sample input files. You can try running them. They only thing I know of that won't work is saving the results to an output file. The input file currently has a nonsensical entry for the folder where you want the output file to go, so it will probably throw an error. You can edit the file and change the output directory to a directory that exists on your computer and then it should work.
When you decide to enter your own data, I recommend you start with one of the sample input files that is closest to the scenario you want to run and make changes to it. That will be easier than starting from scratch.
Here is the file: Investment Analyzer Install Folder.zip
This software is being distributed as a freeware beta version at the moment. If you download it, please send me a note at the email below to tell me that you did so. If you pass it on to someone else, please ask them to email me and let me know they have it.
I would like feedback on it so I can make it better. In the long run, if people find it useful, I'd like to make it a shareware and ask for some nominal payment from people who like it.
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