Method and system for developing a time horizon based investment strategy

• US 5,987,433 A
• Filed: 06/03/1996
• Issued: 11/16/1999
• Est. Priority Date: 06/03/1996
• Status: Expired due to Fees

• Current Assignee: General Electric Company
• Original Assignee: General Electric Company
• Inventors: Crapo, Andrew Walter
• Primary Examiner(s): Hafiz, Tariq R.
• Assistant Examiner(s): Rhodes, Jason W.
• Application Number:
  US08/659,033
• Time in Patent Office: 1,261 Days
• Field of Search: 705/36-39, 705/35, 705/40, 705/42
• US Class Current: 705/36.00R
• CPC Class Codes: G06Q 40/00 Finance; Insurance; Tax strategies; Processing of corporate or income taxes
• CPC Class Codes: G06Q 40/04 Trading; Exchange, e.g. stocks, commodities, derivatives or currency exchange
• CPC Class Codes: G06Q 40/06 Asset management; Financial planning or analysis

Abstract

The present invention discloses a method and system for developing a time horizon based financial model for investing towards attaining at least one financial objective. Each financial objective is characterized by an event having a financial amount and a future time when the financial amount is expected to be needed. In the present invention, a time horizon is specified in accordance with the financial objectives. In addition, the time horizon is divided into a plurality of segments. An array of future expenses for each of the financial objectives is then provided. The array indicates recurring costs of a specified amount, frequency of the costs, and duration of the costs. A fraction of the future expenses accruing in each time horizon segment is then identified. An investment of a specified amount of money is then modeled during each of the time horizon segments for satisfying the future expenses. The amount of money invested may change as the time horizon changes from segment to segment. Next, an expected rate of return at each time horizon segment is then determined for the invested money. The expected rates of return change as the time horizon changes from segment to segment. The expected rates of return are then used to determine amounts of money to be saved for fulfilling each of the financial objectives. The amount of money saved may change as the time horizon changes from segment to segment.

Claims

1. A computer-implemented method for developing a time horizon based financial model for investing towards attaining at least one financial objective, each financial objective characterized by an event having a financial amount and a future time when the financial amount is expected to be needed, the method comprising the steps of:

specifying a time horizon in accordance with the financial objectives, the time horizon divided into a plurality of segments;

providing an array of future expenses for each of the financial objectives, the array indicating recurring costs of a specified amount, frequency of the costs, and duration of the costs;

identifying a fraction of the future expenses accruing in each of the time horizon segments at each point in time, starting at the present time and going into the future;

modeling an investment of a specified amount of money during each of the time horizon segments for satisfying the future expenses, the amount of money invested changing as the time horizon changes from segment to segment;

determining an expected rate of return at each time horizon segment for the invested money, the expected rate of return changing as the time horizon changes from segment to segment, wherein the expected rate of return is a weighted average defined by;

##EQU19## wherein j ranges over the set of time horizon segments, from 1 to H, r_j is the expected rate of return for the jth time horizon, x_j is the amount of future expense in the jth time horizon going forward from the ith period, k ranges over the remaining periods, i to N, and yk is the expected expense in the kth period;

using the expected rates of return for determining amounts of money to be saved for fulfilling each of the financial objectives, the amount of money saved changing as the time horizon changes from segment to segment; and

saving the determined amounts of money for fulfilling each of the financial objectives.

2. The method according to claim 1, wherein the step of modeling comprises selecting a mix of asset classes having varying degrees of risk to be invested in each of the plurality of time horizon segments.

3. The method according to claim 2, further comprising the steps of compiling historical return data for each of the asset classes and using the historical return data to determine the expected rates of return at each time horizon segment.

4. The method according to claim 2, further comprising the step of changing the asset classes as the time horizon changes from segment to segment.

5. The method according to claim 1, wherein the financial objectives comprise events including retirement expenditures, educational expenditures, and special-event expenditures.

6. A system for developing a time horizon based financial model for investing towards attaining at least one financial objective, each financial objective characterized by an event having a financial amount and a future time when the financial amount is expected to be needed, the system comprising:

means for specifying a time horizon in accordance with the financial objectives, the time horizon divided into a plurality of segments;

means for providing an array of future expenses for each of the financial objectives, the array indicating recurring costs of a specified amount, frequency of the costs, and duration of the costs;

means for identifying a fraction of the future expenses accruing in each of the time horizon segments at each point in time, starting at the present time and going into the future;

means for modeling an investment of a specified amount of money during each of the time horizon segments for satisfying the future expenses, the amount of money invested changing as the time horizon changes from segment to segment;

means for determining an expected rate of return at each time horizon segment for the invested money, the expected rate of return changing as the time horizon changes from segment to segment, wherein the expected rate of return is a weighted average defined by;

##EQU20## wherein j ranges over the set of time horizon segments, from 1 to H, r_j is the expected rate of return for the jth time horizon, x_j is the amount of future expense in the jth time horizon going forward from the ith period, k ranges over the remaining periods, i to N, and yk is the expected expense in the kth period;

means for using the expected rates of return for determining amounts of money to be saved for fulfilling each of the financial objectives, the amount of money saved changing as the time horizon changes from segment to segment; and

means for saving the determined amounts of money for fulfilling each of the financial objectives.

7. The system according to claim 6, wherein the modeling means comprises means for selecting a mix of asset classes having varying degrees of risk to be invested in each of the plurality of time horizon segments.

8. The system according to claim 7, further comprising means for compiling historical return data for each of the asset classes and using the historical return data to determine the expected rates of return at each time horizon segment.

9. The system according to claim 7, further comprising means for changing the asset classes as the time horizon changes from segment to segment.

10. The system according to claim 6, wherein the financial objectives comprise events including retirement expenditures, educational expenditures, and special-event expenditures.

11. A computer-implemented method for developing a time horizon based financial model for investing towards attaining at least one financial objective, each financial objective characterized by an event having a financial amount and a future time when the financial amount is expected to be needed, comprising:

specifying a time horizon in accordance with the financial objectives, the time horizon divided into a plurality of segments;

providing an array of future expenses for each of the financial objectives, the array indicating recurring costs of a specified amount, frequency of the costs, and duration of the costs;

identifying a fraction of the future expenses accruing in each of the time horizon segments at each point in time, starting at the present time and going into the future;

modeling an investment of a specified amount of money during each of the time horizon segments for satisfying the future expenses, the amount of money invested changing as the time horizon changes from segment to segment;

determining an expected rate of return at each time horizon segment for the invested money, the expected rate of return changing as the time horizon changes from segment to segment, wherein the expected rate of return is a weighted average defined by;

##EQU21## wherein j ranges over the set of time horizon segments, from 1 to H, r_j is the expected rate of return for the jth time horizon, x_j is the amount of future expense in the jth time horizon going forward from the ith period, k ranges over the remaining periods, i to N, and yk is the expected expense in the kth period; and

making investments according to the determined expected rates of return for fulfilling each of the financial objectives.

12. The method according to claim 11, wherein the modeling comprises selecting a mix of asset classes having varying degrees of risk to be invested in each of the plurality of time horizon segments.

13. The method according to claim 12, further comprising compiling historical return data for each of the asset classes and using the historical return data to determine the expected rates of return at each time horizon segment.

14. The method according to claim 12, further comprising changing the asset classes as the time horizon changes from segment to segment.

15. The method according to claim 11, wherein the financial objectives comprise events including retirement expenditures, educational expenditures, and special-event expenditures.

16. A system for developing a time horizon based financial model for investing towards attaining at least one financial objective, each financial objective characterized by an event having a financial amount and a future time when the financial amount is expected to be needed, comprising:

means for specifying a time horizon in accordance with the financial objectives, the time horizon divided into a plurality of segments;

means for providing an array of future expenses for each of the financial objectives, the array indicating recurring costs of a specified amount, frequency of the costs, and duration of the costs;

means for identifying a fraction of the future expenses accruing in each of the time horizon segments at each point in time, starting at the present time and going into the future;

means for modeling an investment of a specified amount of money during each of the time horizon segments for satisfying the future expenses, the amount of money invested changing as the time horizon changes from segment to segment;

means for determining an expected rate of return at each time horizon segment for the invested money, the expected rate of return changing as the time horizon changes from segment to segment, wherein the expected rate of return is a weighted average defined by;

##EQU22## wherein j ranges over the set of time horizon segments, from 1 to H, r_j is the expected rate of return for the jth time horizon, x_j is the amount of future expense in the jth time horizon going forward from the ith period, k ranges over the remaining periods, i to N, and yk is the expected expense in the kth period; and

means for making investments according to the determined expected rates of return fulfilling each of the financial objectives.

17. The system according to claim 16, wherein the modeling means comprises means for selecting a mix of asset classes having varying degrees of risk to be invested in each of the plurality of time horizon segments.

18. The system according to claim 17, further comprising means for compiling historical return data for each of the asset classes and using the historical return data to determine the expected rates of return at each time horizon segment.

19. The system according to claim 17, further comprising means for changing the asset classes as the time horizon changes from segment to segment.

20. The system according to claim 16, wherein the financial objectives comprise events including retirement expenditures, educational expenditures, and special-event expenditures.