The problem with most financial
planning is they accept a return rate on each of
your investments and project your financial
future on those rates. The argument is over a
span of years your investments will return that
rate "on average." Unfortunately this
is an invalid and risky assumption. Investment
rates vary from year to year. Sometimes they vary
greatly. We cannot accurately predict the return
rate on investments or the inflation rate.
Consider the following simple example
You have $1000.00 invested
and you expect a 10.0% average yearly return
on your investment. In two years your
investment will be worth $1210.00.
Now lets assume your same
$1000.00 returns -10.00% the first year and
+30.00% the second. Your investments after
those two years is worth only $1170.00 even
though your investment returned "on
The above example demonstrates
the need for a mechanism to account for the
volatility of investment return rates and the
variability of inflation. The J&L Financial
Planner has chosen to include two alternatives, a
Monte Carlo Analysis and
a Historical Return Analysis, as that mechanism.
The following paragraphs outline
how the Historical Return Analysis is implemented
by the J&L Financial Planner.
The J&L Financial Planner
allows you to create simple or complex financial
scenarios (financial plans) revolving around your
existing accounts consisting of investment,
retirement, asset, and equity accounts. You
can create and assign up to 15
asset allocation classes for each of your
A simple example would have you create
three asset allocation classes Stocks, Bonds, and
Cash. You would assign each account the
percentage of each of its allocation classes.
mutual fund account may consist of 70 percent
Stocks and 30 percent Bonds, whereas a savings
account would be 100 percent Cash. For each
allocation class you assign, a historical return
data file represents the returns for that class
over an historical time span.
The planner comes
with 6 example data files including 2 stock
files, 2 bond files, 1 cash file, and an
inflation file covering the years 1928 through
The files are provided as examples and
should be replaced with data files which meet
your needs. You can create and edit up to 15
files, each corresponding to an asset allocation
The Historical Return Analysis provides the following option for setting up the analysis:
Do All Years -- If you check this box the analysis will start with the first year in the data files and
get sequential rates from the files for each year of your scenario. It will then choose the next year
in the data files and get sequential rates from the files for each year of your scenario.
It will repeat this until the year it selects from the data files plus the length of your scenario equals
the last year of data in the data files.
Select Asset Class File For Template -- If you select an asset class file from the drop down list the
program will use this asset class file as a template in the following manner:
For each year of your scenario the program will read a year from the template file and use that year as the entry
point into the historical data files.
You have the option of sorting the template file in ascending or descending order.
For example, if you choose the ascending sort the Historical Return Analysis will start with the
lowest performing year of he selected asset class template and proceed each year with a successive
higher performing year.
Using Custom Template Files -- You can create as many custom template files as you wish. They can be located
any where on your computer system. Each template file is used as a source of entry years into the
historical asset class data files.
The years can be arranged in any order you deem necessary for your analysis.
For each year of your scenario the program will read a year from the template file and use that year as
the entry point into the historical data files.
The program will read each year in sequential order. When the program reaches the end of the
file it will start over from the beginning.
The program saves its last entry point and will use this position as the entry the next time
the Historical Return Analysis is run.
It saves the entry point each time you close the program and uses the saved entry point the next time you
run the financial planner.
Each template file is a text file and has the following format. The first entry is a number which
represents the number of years to follow in the file followed by the number of years.
For example, if you want a file which contains 100 years the file might look as such:
and so on for the next 96 entries.
The program uses the template file name as the identification of the analysis (title) when you run the Historical Return Analysis. You should use a file name for each which
represents the emphasis you placed on the analysis.
NOTE: Each time you un-check the custom template box and then re-check it the program will prompt you for a new template.
In summary, the Historical Return
Analysis is able to estimate the probability of
achieving the success of your scenario by
accounting for the yearly variability in the two
main factors contributing to it's outcome, the
return rate on your investments and the inflation
rate. You can execute up to a thousand trials of
your scenario. Each trial is a fully independent
execution of your financial plan, where each year
the return rate on your investments and the
inflation rate can take on a range of values
based on historical asset class return data.
The large number of trials allows
the analysis to compute the statistical
probability your financial plan will be
successful. For example, if after 1000 trials,
750 of those trials achieved your financial
goals, your financial plan success rate is 75.0%.
If your financial plan success
rate is below your expectations the J&L
Financial Planner allows you to make easy
scenario changes to play "what-if" with
your financial future.