Planit:Asset Allocation

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PlanPlus Planit.jpg PlanPlus Planit User Guide Table of Contents



The Asset Allocation components of Planit are recognized in the industry as one of the most dynamic in any planning software available. Our asset classes are based on feedback from individual and corporate users and also based on research and a study of trends in the industry.

Cash Flow Management: "Planit Learning Circle" Session

In this session learn how to set your set target & recommended portfolios for IPS/PFS implementation.

PlanitLearningCircl.jpg [1] |Length: 25 Min 40 sec

To view more sessions like this one please click here.

Current Portfolio

Loginprocess2.jpg |Length: 3min 37 sec

  • When you have inputted your assets at a summary level, 100% of the current investments are assumed to be in “cash” since it’s impossible for the software to know what the actual allocation is. You then have the option to manually identify the actual allocation under each asset class by merely typing in the percentages or the amounts, this depends how you have the “Edit By” set at.
  • With detailed level asset information, the current portfolio will be based on the asset allocation of the assets input.
  • This is a good investment of your time and effort since you want the comparison between the Current and the Target portfolio to be meaningful both here on the screen, IPS document and also the effects the retirement projection in the Personal Financial Strategy document.

Target Portfolio

Loginprocess2.jpg |Length: 3min 59 sec

  • The Recommended and the Target portfolio percentages are determined when the asset allocation screen is first opened based on the responses to the Risk Profile questionnaire, thus the two columns will initially be the same.
  • You have the option to change the target portfolio to be different from the recommended portfolio. Change by selecting a new portfolio from the drop down menu.
  • If the “Custom” portfolio option is available, you are able to select your own weightings as opposed to having a standard portfolio being used.
  • The screen will always display a comparison between Current and Target portfolio Rate of Return, Standard Deviation and Sharpe Ratio.
  • When you are satisfied with the target portfolio illustrated, click on the “Next” arrow icon to proceed.


TIP: Sometimes you may feel the returns may be too high, if this is the case then you can reduce the returns. By using the drop down menu beside the field “Return Reduction” you can reduce the returns by many different percentages. Please keep in mind that the PlanPlus Planit is populated with historical indices data for all asset classes and our goal is to retain data going back t 1950 where available.

Standard Deviation

In PlanPlus Planit we identify the "Risk" associated with a portfolio on both the Asset Allocation screen and in documents by using the term "Standard Deviation" The math to identify "Standard Deviation" is very simple when you are looking at a single asset class. It’s merely measures the degree of deviation that takes place over the time period being measured. For further information on the formulas and calculation method to identify Standard Deviation, you can use the following link: [2].

In PlanPlus Planit you also have to consider that our SD calculations are for multiple asset classes. So when you calculate the SD for a portfolio made up of 8 or 10 asset classes, you have to consider the SD for each of these. You might think it’s just a simple weighted average calculation but it’s more complex than that. Let look at some actual numbers to explain.

Let’s say you have two asset classes you are using. One has a historical SD of 3% and the other has a historical SD of 9%. If the portfolio were 50/50, you’d do a simple weighted average calculation like this:

3% x 50% = 1.5% 8% x 50% = 4.0% SD = 5.5%

If these asset classes were positively correlated to each other (had a correlation of 1) the above calculation would be correct. However, assets are only positively correlated to themselves since you virtually never will have two asset classes that behave exactly the same.

Let’s say that these two asset classes were perfectly negatively correlated (had a correlation of –1). In that case the SD would actually be 0%. This is because the risk is totally eliminated because when one goes up, the other goes down which effectively reduces, or in this perfect example, completely eliminates the risk. That’s why the correlation has to be factored into the calculation. You want to recognize how the asset classes behave against each other and recognize how combining asset classes that are negatively correlated will reduce risk. In PlanPlus Planit our measurement of risk recognizes BOTH standard deviation and correlations.

Here’s an example. Take a portfolio that is 50% Cdn Fixed Income and 50% Canadian Equities. Using the Weighted average calculation, the SD might be:

3.49% x 50% = 1.75% 16.37% x 50% = 8.19% SD = 9.94%

But the SD that’s reported in the software is say 9.5%. Thus the risk is reduced from 9.94% to 9.5% due to how these two asset classes are correlated. Not a huge impact, but with a broader cross section of asset classes, you’ll see more impact through the recognition of how the assets are correlated to each other.

The measurement of Risk in PlanPlus Planit is very sophisticated. The measurement of Standard Deviation combined with correlations means that the calculation is complex and even excel spreadsheets are not able to do this easily. Inside the tables of PlanPlus Planit we maintain the history of every asset class going back to 1950 (where available) and the standard deviations are measured using this data combined with the correlations from a correlation matrix table. The Algorithms to do these calculations are not math for the faint of heart!

Rates of Return for Asset Classes and Portfolios

In PlanPlus Planit we identify rates of return based on the asset classes held in a client's portfolio. To learn more about how these returns are determined, click the following link: Rates of Return

Sharpe Ratio Calculation Explained

The formula for the calculation of the Sharpe Ratio is as follows:

(Portfolio Return – Cash Return) divided by the Standard Deviation for the portfolio.

Translating this to a number using a portfolio return of 5.7%, a cash return of 1.84% and a Standard Deviation for the portfolio of 7.45 would result in a Sharpe Ratio of:

(5.07 – 1.84) divided by 7.45 = Sharpe Ratio of .43

Multiple Portfolios with Unique Current and Target Asset Allocation

On the Asset Allocation screen you’ll notice a new drop down list called “Portfolios” where you can select the portfolio you wish to view. In the example below you’ll see that you can discretely look at the current asset allocation and the target asset allocation for each portfolio. You can also override the recommended investment profile and select an alternative. When you do this, the screen will refresh and display the Recommended Profile above the Selected Profile so you can clearly see that you have elected to choose your own target, or set a custom one.

Having this ability to build portfolios with unique asset allocation targets, based on the investment objectives and goals associated with each portfolio is a powerful feature that allows you to make recommendations that are truly suitable to the needs of your clients.

Asset allocation recommendations.jpg

And finally you can choose to see a view of “All Portfolios” which presents a consolidated view of the Current and Target asset allocation for all of your portfolios rolled up.

This will allow you to see the overall asset allocation for all of the family’s investments and the projected returns and risk associated with the consolidated portfolio. It will be this consolidated return assumption that will be used in the long term projections in the 5.2 version.

As we move forward, it is our intention to extend the functionality of these “Portfolios” and be able to incorporate in the unique return assumptions associated with each into the long term projections. This is expected to be available later in 2010.

Mini Movies which answer very frequently asked questions on Asset Allocation Screen

‘Why do asset classes in the eLearning modules appear to be different than the ones I see on my screen?’: Loginprocess2.jpg |Length: 0min 48 sec

‘Where do PlanPlus rates of return come from and how are they calculated?’: Loginprocess2.jpg |Length: 5min 03 sec

‘How is the risk of a portfolio calculated?’: Loginprocess2.jpg |Length: 1min 59 sec