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Retirement Investing
While there are practically as many reasons
for investing as there are investors, among the more
common goals is to acquire enough assets to retire comfortably
at a reasonable age.
A carefully planned globally diversified portfolio is
well suited to investing toward long-term goals; this
is in contrast to the pursuit of securities that happened
to have performed well in the past, in the hope that
they will continue to outperform in the future. To be
sure, "gambling" in highly risky, undiversified
positions might pay off big time, but you also risk
losing your life's dreams on a long shot.
Beyond simply building an investment portfolio,
many questions must be answered as part of a retirement
plan:
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Time horizon
- How long do you have to work and when do you hope
to retire? |
• |
Initial
investment - How much have you already
accumulated? Withdrawals and inflation - How much
do you expect to spend on your way to and during
retirement, and what impact will inflation have
on your savings? |
| • |
Risk profile - How
willing are you to take investment risks that can
be expected to increase returns (but may also provide
more disappointing returns than planned for)? |
| • |
Market returns -
Considered in conjunction with your risk profile,
what is a reasonable expected return for your portfolio?
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An important statistical tool to help
you form your savings and investment plans is known
as Monte Carlo simulation. Monte Carlo software provides
your advisor with an efficient way to analyze random
phenomena such as market returns. The software randomly
selects annual returns based upon your unique return,
volatility (risk) and correlation parameters. The process
is then repeated thousands of times, allowing us to
report a range of possible outcomes.
The exercise can help clarify issues such
as how much you can plan to spend once you retire, or
how much you can expect to have saved by the time you
are ready to retire. With this knowledge in hand, you
can then make reasonable adjustments to your current
lifestyle as needed.
Monte Carlo differs from the other primary
way to complete retirement planning, known as "straight-line"
planning. While straight-line estimates use a single
point guesstimate to calculate future wealth, Monte
Carlo analyzes and provides you with a range of wealth
values that might happen, depending on factors such
as whether you experience higher- or lower-than-expected
market returns, or greater or lesser earnings and savings.
This seems a more realistic way to evaluate reasonable
odds of achieving your goal in the face of a decidedly
uncertain future.
Monte Carlo analysis is sophisticated
and relatively complex, as it must capture and accurately
reflect the complex world in which we live. But the
reports and advice you receive based on the analysis
are designed to simplify the steps you need to take
to achieve your long-term investment goals. |
