Diversification Analysis Calculator Help
One of the more challenging decisions that needs to be made in retirement is how to divide assets into various investment categories. You can call this "asset allocation", "diversification" or "bucket allocation", but it all means the same thing. To help with that decision we offer a calculator that analyzes how specific allocations have performed throughout history (see Diversification Calculator here). From that analysis you can see the minimum and average returns for any asset mix over any historical period (or span) going back as far as 1921*. You'll also note there are 3 columns in the generated table. The 1st column is probably the least interesting as it is just a linear average of the yearly results. Some Mutual Funds may advertise this rate but is somewhat misleading (see our research paper for details). A better gauge of past returns is the Compound Annual Growth Rate (CAGR) which is the middle column. The last column is CAGR minus actual inflation as recorded by the Consumer Price Index (CPI). If you believe that the market will repeat itself going forward, you can then use this analysis to determine the time buckets for the DoubleBucket™ Variable Annuity. The way the DoubleBucket system works is that you decide on the "best" asset mix for various time frames (by default we use 4 time frames: 5-year, 10-year, 15-year, and 20-year plus). To decide on what is "best" you can experiment with various asset mixes and see how they perform over time. For example, a classic mix is 60% stocks, 30% bonds and 10% cash. You can plug in those numbers into the calculator and then analyze them over any or all spans from its starting period up to 2019. Using the worst and average returns over all those spans, you can then have a certain level of confidence of how that same asset mix will perform going forward.
Doing analysis going back to the 1920's or 30's might be interesting, but is problematic for 2 reasons. For one, the period between 1929 and 1945 − which includes the great depression and WWII − is hopefully an anomaly. Secondly, the data for some asset mixes, such as the NASDAQ, International Stocks and Real Estate are only available from the early 1970's. For each asset class (details here) we note the beginning date for that class. If you specify a beginning date that is earlier than any of your asset classes, the calculator will notify you and you will either need to eliminate that class or adjust your starting date. By default, we use a starting analysis date of 1972 and that's what we use in calculating the "best" allocations for each time bucket. Note that the most important way to measure an allocation mix is to use the inflation-adjusted Compounded Annual Growth Rate (CAGR). You'll find more information on this topic in the DoubleBucket® Research Paper.
To use the calculator, just enter the percentages for each asset as a whole number and make sure they all add up to 100. The "Best" Suggestions radio buttons populate the table with what we think is the best mix for that time frame. You can start there just to see how the calculator is supposed to work. Then, make any modifications you wish to the asset allocations, start year and span length, When everything is entered, select the compute button and the new results will appear.
Go to the Calculator here.