Method and apparatus for optimizing investment portfolio plans for long-term financial plans and goals

• US 20030126054A1
• Filed: 12/28/2001
• Published: 07/03/2003
• Est. Priority Date: 12/28/2001
• Status: Abandoned Application

• Current Assignee: Planscan LLC
• Original Assignee: Planscan LLC
• Inventors: Purcell,, W. Richard Jr.
• Application Number:
  US10/034,872
• Publication Number:
  US 20030126054A1
• Time in Patent Office: Days
• US Class Current: 705/36
• CPC Class Codes: G06Q 40/06 Asset management; Financial planning or analysis

Abstract

The present invention provides information to enable investors to see how portfolio plans comprising pluralities of best-diversified portfolios compare in probabilistic measures of prospects and risks for their long-term financial plans and goals, to enable and educate investors to select and stay on most promising portfolio paths for their long-term plans, goals, and priorities.

Users are enabled to indicate asset classes or investment categories to be considered for investment portfolios, specify a long-term financial plan including cash flows to and from a portfolio plan in a plurality of years, and specify desires for a portfolio plan to comprise different portfolios for differently taxed funds and different investment periods of the financial plan as the time horizon shortens. Concepts and methods of Modern Portfolio Theory are applied in combination with the specified desires for pluralities of portfolios in a portfolio plan to determine a series of best-diversified portfolio plans; for the long-term financial plan, with each of the series of best-diversified portfolio plans Monte Carlo simulations are run to develop a probability distribution of final wealth at the end of the time horizon of the financial plan. From these analyses, best-diversified portfolio plans are compared graphically in probabilistic measures of long-term results for the plan, on which measures the portfolio plans will standardly rank and compare differently.

From the foregoing, investors can obtain, for plans with realistic pluralities of cash flows and portfolios, information and understanding for judging and selecting portfolio plans that offer best prospects for their long-term goals and priorities and for staying with well-selected portfolio plans in the face of short-term volatilities that would frighten less informed investors off course.

Claims

1. A method that relates to finding best investment portfolio plans for long-term financial plans and goals, comprising:

obtaining information on a plurality of investment categories, information on a financial plan, and information on portfolio plans, said information on a plurality of investment categories including data on return rates per investment period including an expected return rate and a return rate standard deviation for each of said investment categories and a return rate correlation coefficient for each pair of said investment categories;

said information on said financial plan including a time horizon comprising a plurality of investment periods, at least a first investment amount in a portfolio plan in a first investment period in said time horizon, and at least a second investment amount put into or a first withdrawal amount taken from said portfolio plan in a subsequent investment period of said time horizon; and

said information on portfolio plans including information useful for defining a series of portfolio plans in which at least a first portfolio plan in a series comprises a plurality of portfolios, each portfolio being a number of said investment categories in particular unique allocation proportions; and

providing at least a first comparison of a series of best-diversified portfolio plans with respect to at least a first criterion relative to the final wealth of a portfolio plan, wherein;

each of said best-diversified portfolio plans conforms to said information on portfolio plans and comprises a number of best-diversified portfolios, each of said best-diversified portfolios having an expected return rate and the smallest return rate standard deviation of any portfolio having the same said expected return rate in a population of portfolios each comprising a number of said investment categories;

said final wealth is the value of a portfolio plan at the end of said time horizon using said portfolio plan for said financial plan and has a probability distribution; and

said first criterion comprises a value for said final wealth and a probability that said final wealth will equal or exceed said value and is determined for a portfolio plan using simulation.

2. A method, as claimed in claim 1, wherein:

said investment period is the year.

3. A method, as claimed in claim 1, wherein:

at least one of said investment categories is an asset class.

4. A method, as claimed in claim 1, wherein:

at least one of said investment categories is a mutual fund or other investment vehicle.

5. A method, as claimed in claim 1, wherein:

said obtaining step includes displaying identifications of a number of investment categories from which the user may choose said plurality of investment categories.

6. A method, as claimed in claim 5, wherein:

said displaying step includes displaying said data on return rates of said investment categories.

7. A method, as claimed in claim 6, wherein:

said displaying step includes enabling revision or replacement by the user of at least one of said identifications or said data on return rates.

8. A method, as claimed in claim 1, wherein:

said financial plan includes a desired value for final wealth of a portfolio plan at the end of said time horizon.

9. A method, as claimed in claim 1, wherein:

said financial plan includes a plurality of investment amounts or portions of investment amounts subject to different rules of taxation.

10. A method, as claimed in claim 1, wherein:

said financial plan includes said first withdrawal amount.

11. A method, as claimed in claim 1, wherein:

said financial plan includes data to enable calculation of amounts and time periods of deductions from a portfolio plan for fees and costs and for taxes including deductions based on investment returns, withdrawals from a portfolio, and portfolio value.

12. A method, as claimed in claim 1, wherein:

said financial plan includes at least a first inflation rate to enable calculation of inflation adjustments of future values.

13. A method, as claimed in claim 1, wherein:

said financial plan includes information defining as a probability distribution said number of said investment periods in said time horizon, said first inflation rate, or any other item of said information on said financial plan.

14. A method, as claimed in claim 1, wherein:

any investment amount, withdrawal amount, final wealth, or other measure of financial value may be expressed either before or after adjustment for any of the following;

any fees and costs, any taxes, any inflation.

15. A method, as claimed in claim 1, wherein:

said providing step includes applying concepts of Modern Portfolio Theory using said data on return rates of said plurality of investment categories to obtain information defining an efficient frontier curve on a graph, said curve comprising a range of portfolio points each representing a number of best-diversified portfolios in said population.

16. A method, as claimed in claim 15, wherein:

said applying step includes applying concepts and methods known collectively as CAPM including investing or borrowing at a rate commonly termed a “

risk-free”

rate.

17. A method, as claimed in claim 1, wherein:

said population of portfolios includes only portfolios having allocation proportions that conform to at least a first allocation constraint defining a minimum or maximum total allocation proportion for a number of said investment categories.

18. A method, as claimed in claim 1, wherein:

said population of portfolios includes only portfolios in which the allocation proportions of said investment categories are integer multiples of an integer allocation percentage increment.

19. A method, as claimed in claim 18, wherein:

said portfolios are grouped and characterized with respect to expected return rate according to an incremental sequence of expected return rates.

20. A method, as claimed in claim 15, wherein:

said applying step includes displaying said efficient frontier curve on an efficient frontier graph with axes representing expected return rate and return rate standard deviation.

21. A method, as claimed in claim 20, wherein:

said displaying step includes showing on said efficient frontier graph a number of portfolio points each representing a user-specified portfolio.

22. A method, as claimed in claim 20, wherein:

said displaying step includes enabling user interaction with said graph including choosing at least a first portfolio point and showing information for said first portfolio point graphically and numerically, said information including an expected return rate, a return rate standard deviation, and allocation proportions of at least a first portfolio corresponding to said first portfolio point.

23. A method, as claimed in claim 22, wherein:

said information includes allocation proportions for each of a plurality of portfolios in said population determined to best correspond to said first chosen portfolio point.

24. A method, as claimed in claim 22, wherein:

said information includes upper and lower limits at a specified confidence level for the highest and lowest return rate in the best and worst investment periods of said time horizon.

25. A method, as claimed in claim 1, wherein:

each of said portfolio plans comprises a plurality of component portfolio plans in which separate investment amounts or separate portions of investment amounts may be placed.

26. A method, as claimed in claim 25, wherein:

said component portfolio plans in a portfolio plan are subject to different rules of taxation.

27. A method, as claimed in claim 25, wherein:

said component portfolio plans in a portfolio plan comprise different portfolios.

28. A method, as claimed in claim 1, wherein:

at least one portfolio plan or component portfolio plan is rebalanced at the end of at least a first investment period, having at the start of the next investment period the same portfolio as at the start of said first investment period.

29. A method, as claimed in claim 1, wherein:

at least one portfolio plan or component portfolio plan is reallocated at least once during said time horizon, comprising one portfolio before said reallocation and another portfolio after said reallocation.

30. A method, as claimed in claim 1, wherein:

said series comprises portfolio plans that each have the same number of component portfolio plans and are all defined according to a common system of increments and limits regarding portfolios in the first investment period of said time horizon and times and methods of rebalancing and reallocation of portfolios in subsequent investment periods of said time horizon.

31. A method, as claimed in claim 1, wherein:

said first criterion is the probability that said final wealth will equal or exceed a desired value for final wealth.

32. A method, as claimed in claim 1, wherein:

said first criterion is the highest value that said final wealth has a predetermined probability of equaling or exceeding.

33. A method, as claimed in claim 1, wherein:

said providing step includes producing a number of simulations of said financial plan using a portfolio plan for which assessment is to be performed.

34. A method, as claimed in claim 33, wherein:

said producing step includes determining separately for each investment period of each simulation a return rate for at least a first portfolio of said portfolio plan for said investment period by random selection from a probability distribution for the return rate of said portfolio.

35. A method, as claimed in claim 34, wherein:

said probability distribution for a return rate is determined using an expected return rate and a return-rate standard deviation and assuming one of a number of shapes for said probability distribution.

36. A method, as claimed in claim 35, wherein:

said assuming step includes assuming that said shape of said probability distribution is normal or lognormal.

37. A method, as claimed in claim 34, wherein:

said determining step includes establishing said probability distribution for the return rate of at least one portfolio in at least one investment period using at least a first serial correlation coefficient reflecting an effect upon said probability distribution of at least one return rate in at least one previous investment period.

38. A method, as claimed in claim 34, wherein:

said determining step includes ascertaining for at least one investment period a return rate for at least a second portfolio in said portfolio plan in said investment period by random selection from a probability distribution for said return rate determined using a return rate randomly selected for said first portfolio for said investment period and the covariance of the return rates of said first portfolio and said second portfolio.

39. A method, as claimed in claim 33, wherein:

said producing step includes for each simulation determining a return rate for each portfolio in a portfolio plan in each investment period of said time horizon by random selection of a historical investment period using actual historical return rates of investment categories for the selected historical investment period.

40. A method, as claimed in claim 33, wherein:

said producing step includes for each simulation using historical return rates of investment categories for a series of consecutive historical investment periods equal in number to the number of investment periods in said time horizon.

41. A method, as claimed in claim 33, wherein:

said producing step includes determining values of a number of items in said financial plan by random selection from probability distributions of values of said items.

42. A method, as claimed in claim 33, wherein:

said producing step includes grouping final wealths produced by said simulations according to a scale of value increments to develop a final wealth frequency distribution, interpreting said final wealth frequency distribution as a final wealth probability distribution, and using said probability distribution to determine specifications of said probability distribution such as the expected final wealth or the median final wealth, the probability that the final wealth will equal or exceed a value, or the largest value that the final wealth has a probability of equaling or exceeding.

43. A method, as claimed in claim 33 wherein:

said producing step includes producing said simulations using each portfolio plan in said series.

44. A method, as claimed in claim 1, wherein:

said providing step includes comparing in said first comparison a number of portfolio plans designated by the user.

45. A method, as claimed in claim 1, wherein:

said providing step includes displaying for each of said series of portfolio plans a plurality of the following;

identifying name, symbol, or number;

expected final wealth;

median final wealth;

probability that the final wealth will equal or exceed a predetermined amount;

highest amount that the final wealth has a predetermined probability of equaling or exceeding;

an expected return rate characteristic of the portfolio plan;

a return-rate standard deviation characteristic of the portfolio plan;

a lowest-return-rate characteristic of the portfolio plan for an individual investment period relative to a predetermined probability; and

a lowest-return-rate characteristic of the portfolio plan for the investment period in which said characteristic is lowest of all investment periods in said time horizon relative to a predetermined probability.

46. A method, as claimed in claim 1, wherein:

said providing step includes presenting said first comparison graphically.

47. A method, as claimed in claim 46, wherein:

said presenting step includes displaying said first comparison in a graph with a first axis representing said first criterion, a second axis representing a second measure of said portfolio plan, and a portfolio plan point representing each portfolio plan in said series relative to said first axis and said second axis.

48. A method, as claimed in claim 47, wherein:

said second measure is one of the following;

identifying name, symbol, or number;

expected final wealth;

median final wealth;

probability that the final wealth will equal or exceed a predetermined amount;

highest amount that the final wealth has a predetermined probability of equaling or exceeding;

an expected return rate characteristic of the portfolio plan;

a return-rate standard deviation characteristic of the portfolio plan;

a lowest-return-rate characteristic of the portfolio plan for an individual investment period relative to a predetermined probability; and

a lowest-return-rate characteristic of the portfolio plan for the investment period in which said characteristic is lowest of all investment periods in said time horizon relative to a predetermined probability.

49. A method, as claimed in claim 47, wherein:

said displaying step includes choosing by the user of at least a first portfolio plan point represented on said graph.

50. A method, as claimed in claim 49, wherein:

said choosing step includes choosing by the user of a value along an axis of said graph from which value said first portfolio plan point is designated.

51. A method, as claimed in claim 49, wherein:

said choosing step includes displaying values associated with said first portfolio plan point relative to each axis of said graph.

52. A method, as claimed in claim 49, wherein:

said choosing step includes identifying at least a first portfolio plan designated to correspond to said first portfolio plan point.

53. A method, as claimed in claim 52, wherein:

said identifying step includes displaying allocation proportions of at least a first portfolio of said first portfolio plan.

54. A method, as claimed in claim 53, wherein:

said displaying step includes presenting additional information necessary to determine all allocation proportions of all portfolios in said first portfolio plan in each investment period of said time horizon.

55. A method, as claimed in claim 49, wherein:

said choosing step includes identifying each of a plurality of portfolio plans designated to correspond to said first portfolio plan point.

56. A method, as claimed in claim 49, wherein:

said choosing step includes selecting at least a first portfolio plan corresponding to a point on said graph.

57. A method, as claimed in claim 56, wherein:

said selecting step includes displaying a probability distribution graph showing a probability distribution of the final wealth of said first portfolio plan.

58. A method, as claimed in claim 57, wherein:

said displaying step includes showing on said probability distribution graph a probability distribution of the final wealth of a second portfolio plan.

59. A method, as claimed in claim 57, wherein:

said displaying step includes indicating by the user of a target value for the final wealth of a portfolio plan.

60. A method, as claimed in claim 59, wherein:

said indicating step includes showing for each of a number of portfolio plans represented on said probability distribution graph the probability that the final result will equal or exceed said target value.

61. A method, as claimed in claim 56, wherein:

said selecting step includes displaying a simulations graph showing at least a first simulation of the progression of portfolio value investment period by investment period through the time horizon for said first portfolio plan.

62. A method, as claimed in claim 61, wherein:

said displaying step includes showing on said simulations graph a plurality of said simulations.

63. A method, as claimed in claim 61, wherein:

said displaying step includes showing on said simulations graph a number of said simulations for a second portfolio plan.

64. A method, as claimed in claim 56, wherein:

said selecting step includes displaying a sensitivity graph in which a first axis represents a range of values for a first item of said financial plan, a second axis represents a range of values for said first criterion, and values are represented for said first criterion of said first portfolio plan for each of a plurality of values of said first item of said financial plan.

65. A method, as claimed in claim 64, wherein:

said first item of said financial plan is said time horizon.

66. A method, as claimed in claim 64, wherein:

said displaying step includes showing on said sensitivity graph values for said first criterion of a second portfolio plan for each of a plurality of values of said first item of said financial plan.

67. A method, as claimed in claim 64, wherein:

said displaying step includes showing on said sensitivity graph a plurality of curves each representing a different value for a second item of said financial plan and showing values of said first criterion of said first portfolio plan for each of a plurality of values of said first item of said financial plan.

68. A method, as claimed in claim 64, wherein:

said displaying step includes choosing by the user of a value for each of a number of items of said financial plan and displaying a corresponding value of said first criterion for said first portfolio plan.

69. A method, as claimed in claim 1, wherein:

said obtaining step includes providing a user interface on a screen of a computer or other electronic device for user selectable display of said information including entry boxes in which the user may make entries or changes in said information and buttons or other interaction objects by which the user may make selections pertaining to said information.

70. A method, as claimed in claim 1, wherein:

said providing step includes providing a user interface on a screen of a computer or other electronic device for user selectable display of a number of said comparisons, graphs, and information on portfolio plans, including scrollbars, buttons, or other objects through which the user may make selections and carry out other interactions relative to said comparisons, graphs, and information.

71. An apparatus that relates to finding best investment portfolio plans for long-term financial plans and goals, comprising:

computer memory for storing information on a plurality of investment categories, information on a financial plan, and information on portfolio plans, said information on a plurality of investment categories including data on return rates per investment period including an expected return rate and a return rate standard deviation for each of said investment categories and a return rate correlation coefficient for each pair of said investment categories;

said information on said financial plan including a time horizon comprising a plurality of investment periods, at least a first investment amount in a portfolio plan in a first investment period in said time horizon, and at least a second investment amount put into or a first withdrawal amount taken from said portfolio plan in a subsequent investment period of said time horizon; and

said information on portfolio plans including information useful for defining a series of portfolio plans in which at least a first portfolio plan in a series comprises a plurality of portfolios, each portfolio being a number of said investment categories in particular unique allocation proportions; and

at least a first computer processor for providing at least a first comparison of a series of best-diversified portfolio plans with respect to at least a first criterion relative to the final wealth of a portfolio plan, wherein;

each of said best-diversified portfolio plans conforms to said information on portfolio plans and comprises a number of best-diversified portfolios, each of said best-diversified portfolios having an expected return rate and the smallest return rate standard deviation of any portfolio having the same said expected return rate in a population of portfolios each comprising a number of said investment categories;

said final wealth is the value of a portfolio plan at the end of said time horizon using said portfolio plan for said financial plan and has a probability distribution; and

said first criterion comprises a value for said final wealth and a probability that said final wealth will equal or exceed said value and is determined for a portfolio plan using simulation.

72. An apparatus, as claimed in claim 71, further comprising:

an electronic display screen for displaying at least said first comparison including display of said first comparison in a graph.

73. An apparatus, as claimed in claim 71, further comprising:

input devices for the user to enter, select, change, and otherwise determine said information and information on portfolio plans and to interact with said comparisons including selection of said information and comparisons to be displayed on an electronic display screen.

74. An apparatus, as claimed in claim 71, further comprising:

communication devices for obtaining electronically said information from other computers and for sending said information and comparisons to other computers.