Planit:Case Study on Asset Allocation with Detailed Assets

From Planipedia

A key part of the investment planning process is putting in place a new strategy for your clients that holds a higher rate of return and efficiencywhile considering their risk tolerance or portfolio constraints.

Example Problem One:

Overall your clients have an aggressive risk profile, but while they want to make aggressive investments, they want you to be conservative in the returns you project and use for creating their life goals strategy. Specifically, they want you to reduce the rates of return by about 1.00%.

Solution using Detailed Assets and Asset Allocation

On the Risk Profile screen, simply answer the questions so that an Aggressive Risk Profile is calculated.

Once this has been completed, click on the Next arrow in the top right-hand corner to continue to the Asset Allocation screen. On this screen you will find that because you have already entered detailed assets, the screen has no editable fields, and thus is already complete.

However, the clients indicated they wanted you to be more conservative with their rates of return by 1.00%. At the bottom of the screen, use the drop-down menu beside Return Reduction and set it to 1.0%. (See Figure 3.25) Hit Calculate so the reduction is applied to the rates of return for the current and target portfolio.

Note: This feature does not allow you to reduce the rate of return of specific asset classes. Since those asset classes are based on historical indices, you are providing reasoned assumptions for your client’s plans, as well as protecting yourself against legal issues if you’re return estimates are off from the returns realized after any number of years.

Now you can identify the rate of return for the current and target portfolios on the bottom section of the screen.

Note: The rates of return seen on your screen may not be the same as shown here. Rates of return will depend on the asset classes your deployment uses, as well as the year you are doing your analysis.

Go to the exercise to test your knowledge on recommending a target portfolio.