What Can You Learn By Having Your Portfolio Results Tested In Advance?

Friday, June 12, 2015| 1 Comment

Estimated reading time: 9 minute(s)

Having your portfolio results tested in advance is the same as printing out a map or using a GPS device to get you where you need to be before you set out to get there. We know the power and advantages of preplanning a route for a trip. The reason we print out a map of where we are going is to get us where we are heading as efficiently as possible and to prevent us from missing an important turn and costing us precious time and preventing stress and anxiety.


Good news! You can now use that same strategy for your retirement portfolio. There are a few steps in having your portfolio results tested in advance. First, an analysis must be preformed before a test can be run.


A proper analysis will tell you what your real asset allocation is. This will show you if your portfolio is built congruent with your goals and risk tolerances. It will also show you your average 1, 3, 5, & 10 year returns.


Most importantly, a proper test will show you what the maximum drawdown number of your portfolio is in any given year. This is often the most important number in the analysis because it can help show what the cost of another market sell-off may be to investors (what they are at risk of losing).


A proper analysis will also create a scatterplot detailing which holdings are helping or hurting performance. Knowing which holdings are helping or hurting performance can help investors identify where changes may be made to improve performance and decrease risk.

Finally, a proper analysis will create a correlation matrix. A correlation matrix tells investors if they are truly diversified or if they are buying the same thing in the portfolio. I equate this to are you buying things just to buy or is each holding fulfilling a different objective to add strength and synergy to the investment strategy.


After a proper analysis is preformed, a proper test can show where a person is likely to end up with their current portfolio. Are you going the direction you want as efficiently and safely as possible?


A proper test will randomize returns based upon historical returns and standard deviation of the portfolio. It’s important to have the test randomized because investing is not a straight line and returns are just that…random.


Using random returns will show how much money a portfolio may have in the best case scenario, on average, and worst case scenario during retirement. This can be a real eye-opener for individuals who get to see the results of their current holding and where they may end up with them.


A proper test can also help to identify trends of where and when a portfolio may experience difficulties. Personally, I like to see problems before they occur, so there is time to make the appropriate adjustments to avoid those problems, rather then going through the problem and realizing a change or adjustment should have been made much sooner.


Having a proper portfolio analysis and test can be of great benefit to all investors. Knowing if the route your on is as efficient and safe as possible can help to relieve a lot of stress and anxiety for people heading toward retirement.

If you would like to talk more visit us at http://solidwealthadvisors.com/contact-us/


Call my office today to talk about having a test performed on your portfolio 970-229-1616.

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