Asset allocation tutorial and primer for investors and financial advisors.

Asset Allocation: A Top-level Tutorial

Comprehensive Asset Allocation Calculator Asset Allocation Models with Our Historical Returns Asset Distribution Software Text that Explains the Asset Allocation Reports About Efficient Frontiers and Portfolio Optimizing
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How and Why Asset Allocation Techniques are Used to Invest Money

The Most Important Investment Concept to Understand is There Are Only Three Ways to Manage Money:

1) Market Timing: Whenever one makes an investment decision based on a forecast of a market, asset class, or security going up or down, then market timing techniques are being utilized.

2) Security Selection: This is deciding which investment to buy or sell compared to others of the same type. For example, deciding whether to buy a bond or a growth stock would be an asset allocation or market timing decision.

Deciding whether to buy AMD or Intel would be a security selection decision. This is because both stocks are in the same asset class. Stock or ETF picking is the most-common form of security selection.

3) Asset Allocation: The art and science of spreading money around between different types of investment asset classes to help increase and stabilize returns, while lower risks and volatility through diversification. This is also known as optimizing an investment portfolio, making it more efficient.

Asset classes are how different types of investments are categorized to distinguish them from one another. For example, CDs, bonds, stocks, gold, and real estate are different in terms of risk, reward, taxation, and income.

All three methods can be used simultaneously in making one investment decision.

The focus of this page is only on asset allocation.

It's the mutual fund managers' role to time the markets and select the securities. This makes it so you don't have to, so you can focus solely on using asset allocation techniques.

About investing asset allocation and modern portfolio theory.

Using Asset Allocation Strategies Helps and Saves You in Many Ways

• You don't always realize more return just by assuming more risk in the Real World. Most of the time, when you assume more risk, you just lose more money.

Asset allocation allows more control over how much return you'll probably get in exchange for assuming more risk.

• Asset allocation is the only non-derivative technique you can use to reduce risk (lower overall portfolio volatility), increase income, and get better returns, all at the same time. It's the only one of the three ways of managing money that reduces risk. The other two methods greatly increase risks.

For example, with a well-allocated portfolio, if the S&P 500 goes down 20%, you'll probably be down less than 17%. This is because you'd have less exposure to stocks when you hold other asset classes. If you're a stock / ETF picker or a market timer, chances are you'll be down over 25%.

• Even though using asset allocation eliminates the need for you to time markets and pick securities, it still has to be done by someone.

That's the mutual fund manager's job. They have the armies of analysts and millions invested in computers, people, and systems needed to perform these mostly futile tasks.

You don't, and that's the point. If you want to compete with them, then you'll lose most of the time. Winning means realizing low risk and good returns, while not having to waste time and money trying to manage money.

• Asset allocation saves you a lot of time. Other than updating mutual funds and quarterly rebalancing, you don't have to pay much attention to investment portfolios. If you really want to minimize time, you can use index funds or index ETFs, which rarely need to be monitored or updated (but still need to be rebalanced).

• Asset allocation saves you grief, worry, anxiety, stress, from losing sleep, and having to be glued to the TV or phone or computer to keep track of the markets and your holdings. There's no need to baby-sit a security, and have access to a phone or the Internet, to be ready to trade at all times to avoid losses. Asset allocation allows you to relax, sleep better, and take real vacations.

• Asset allocation saves you money because you don't have to pay top-dollar for all of the trading costs associated with high-turnover market timing and/or stock or ETF picking strategies. It's the mutual fund managers' job to do all of the trading. You'll have to pay these mutual fund management fees, but they're much less than you'd pay on your own. They're able to keep their expenses down because of competition and economies of scale.

• You can still brag at parties that you were smart enough to buy something before it took off. When you hold a diverse portfolio of mutual funds comprised of many asset classes, then you're bound to be holding securities of the current fad. Whatever the current hot thing is you'll usually be able to say, "I bought that before it went through the roof!"

• Asset allocation strategies are also great for diversifying and enhancing portfolio income, which is critical during retirement. Maximizing natural income yields greatly reduces the need to dip into principal (sell shares).

Investment portfolios will last much longer if you can get the spendable income needed to pay living expenses mostly by their normal income distributions (interest, dividends, and realized capital gains).

• If you're an investment professional, asset allocation saves you from having to pass the Finra Series 7 licensing exam. Our turnkey asset allocator systems just use regular open-ended mutual funds, so only a Series 6 is required to use them.

• Asset allocation saves advisors from having to deal with client phone calls when the markets go down. When they look up their account values online, they'll usually see that half of their holdings went down, a quarter were flat, and a quarter went up; and then not bother you. They also won't complain that you lost them a ton of money in bad markets, because this would be minimized. Clients tend to call advisors when their portfolio lost more than the markets - which is usually what happens when it's managed using market timing or stock / ETF picking. You will usually lose less money than the markets with a well-allocated portfolio.

• Asset allocation also saves advisors from getting into trading trouble. First, there are no B or C-share classes in our mutual fund recommendations, so those compliance red flags will never be raised.

There are also many times fewer trades when you buy and hold mutual funds compared to trading stocks or ETFs or timing markets.

So compliance will annoy you less about excess trading, churning to drum up commissions, and those types of common abuses.

Fewer trades result in lower trading costs, less time and administrative work, and fewer mistakes that need to be fixed.

Next, you can use our mutual fund picks to justify trading to Finra or BD compliance. It has the reasons for the switches. So if anyone questions your trades you can say, "I'm using this turnkey investment management program, and I was just following their recommendations." Once they see what you're doing, they'll leave you alone, because compliance loves these types of logical diversified investment management programs.

Once they see that you're fact finding correctly to determine investment risk tolerance (and maybe even using an IPS), they'll leave you alone more, and may even use you as an example to show others how things should be done. This will help put you on their good side, even if you've been on their watch list in the past.

So not only will asset allocation save you time, worry, money, trouble, and work; once you start getting better returns with lower risk for your clients, you'll be on everyone's good side.

This will help let compliance cut you slack if you ever end up under their microscope. All of this will help keep your U4 / U5 clean, which is very important to your future, especially if you plan to eventually work your way up the financial advisor food chain / pyramid.

This image sums this investment strategy up better than anything else:

You are the winning turtle with asset allocation, compared to all other investment strategies!

The Disadvantages of Asset Allocation

You're probably going to pay a little more in taxes with asset allocation, because you're probably going to be making more income and profits. You'll also probably be realizing less tax-deductible losses.

You won't be the life of the party when the topic is stock or ETF trading or market timing. Why? For the same reason the media only focuses on market timers and stock or ETF pickers. Because asset allocation is boring! There is literally nothing to talk about other than which asset class is currently up or down. This is shown on the table of mutual fund, ETF, and benchmark index returns.

You're also guaranteed not to strike it rich if a big bet pays off. If something doubles overnight, only that portion of the portfolio that was invested in that asset class will be affected. This is usually less than 15% with asset allocation.

Gambling with a large portion of money (using stocks, ETFs, margin, derivatives, etc.), and lucking out, is the one and only way to get rich quick in financial markets. Very few advisers can do this in efficient markets these days. You've been at it for years, and haven't struck it rich yet. It just gets harder over time, and nothing here will magically change, so why keep trying?

Last, but not least, sometimes asset allocation just "doesn't work." But then this all depends on how you look at it, the benchmarks used, etc.

Judging by the results of the Investing Models since '99, asset allocation worked great 12 out of the last 19 years, and okay 13 out of the last 19 years.

2011 was the worst year for our passive asset allocation strategy - only the Conservative Fee-Based Model beat the S&P 500 for the year.

So if you average these two numbers, asset allocation worked 10.5 of the last 13 years, which is only 81% of the time.

If you change the benchmark from S&P 500 to the DJIA (only 30 stocks), then here's the numbers using the 22 asset class benchmarks we work with in 2011:

DJIA: 8.38%
Short-Term U.S. Bond Index (Barclays Gov / Credit 1-3 Yr.): 1.56%
Intermediate-/Long-Term/ U.S. Bond Index (Barclays & S&P US Aggregate Bond): 7.84%
High-Yield (junk) Bond Index (Barclays High-Yield Corporate Bond): 4.98%
Int'l (not global) Bond Index (Citi WGBI Non-USD Bond): 5.17%
Emerging Markets Bond (Citi EMBI Capped Brady): -13.96%
Large-cap Value Index (Russell 1000 Value): 0.39%
Large-cap Growth Index (Russell 1000 Growth): 2.64%
Mid-cap Index (Russell Mid-cap): -1.55%
Small-cap Index (Russell 2000): -4.18%
Technology (DJ US Technology Trust USD): 0.16%
Biotech / Health Care Index (DJ Healthcare): 11.75%
Micro-cap Index (Bridgeway Ultra-Small Company Market): -7.86%
Internet Index (First Trust Dow Jones Internet Index): -5.82%
Int'l All-cap Index (MSCI EAFE USD): -12.14%
Int'l Small-cap Index (MSCI EAFE Small-cap NR USD): -15.94%
Emerging Markets Index (MSCI EM USD): -18.42%
Real Estate Index (FTSE NAREIT All REITs): 7.28%
Tangibles Index (Goldman Sachs Natural Resources): -7.35%

The one and only way you would have beaten the DJIA in 2011 was to be near fully-invested in Biotech / Health Care during the whole year.

So about 15% of the time (when there's large dislocations, once-in-a-lifetime economic debacles, or just weirdness going on in the economy), asset allocation may look like it has temporarily failed.

Also keep in mind that this is using a portfolio Model with a fraction of the risk of the S&P 500, or DJIA, because of the extreme diversification.

The S&P 500 and DJIA is 100% U.S. equity, so if the markets really go down, and stay down, the chances of the Models going down more are reduced by the hundreds of securities held that are not in those down markets.

So even though it's not perfect during up, or even flat years, it's close enough to perfect in down years. This is what you should care most about - not getting wiped out over a short time frame. Sometimes what's important is the return of principle, not the return on principle.

The Four Methods of Performing Asset Allocation
- and -
Links to Our Three Asset Allocation Software Programs

Method #1: The most-common method of performing asset allocation is by using pre-determined (canned and generic) asset allocation models.

If a set mix of asset classes in a portfolio exists before an investor's risk tolerance is determined, then that allocation mix is usually called a Model Portfolio.

The only life factor that determines which portfolio Model to use is risk tolerance category. This is determined by filling out and scoring an investment fact finder.

Most financial advisors make investing Models based on what their firm specializes in. Then they just put everyone's money with the same risk tolerance into the same portfolio Model. This makes everything much easier to manage.

Investor Models are also the best way to get the concept of how an advisor wants to invest money across to investors. All it takes is explaining asset classes, weightings, a table, a pie chart, and telling what historical performance has been. Then everyone usually gets it enough to engage.

The main problem is that stated performance is usually just the history of the current recommended investments, meaning they don't account for past trades / recommendations, fees, or rebalancings. This is very misleading, because returns are usually much less when past recommendations are accounted for.

But because Models are the most logical way for advisors to invest money for clients, Finra and BD compliance will let advisors use them with hypothetical returns, as long as it's done properly.

Both our Model's hypothetical returns and their actual returns (accounting for past trades and rebalancings) are shown on the first two rows on the table below so you can see these huge differences.

Method #2: Use comprehensive asset allocation software that accounts for most all of the important life factors needed to match an investment portfolio to someone's life.

Unlike allocation Models, which exist before someone is around to invest in them, here the investor inputs various life factors needed to calculate a custom allocation mix that More accurately reflects their current situation.

So the end result is not just using one of a few generic pre-existing Model allocations, because there are dozens.

Model Portfolios only take one life factor into account - investment risk tolerance category. Comprehensive allocation calculators also take investing risk tolerance into account as the most important factor in determining the mix. But it also uses several more life factors. This results in customized investment portfolios that match up with lives as well as possible (for an investment software program).

It then displays current and proposed portfolio snapshots, and may have future projections of both current and proposed portfolios. This allows complete control over, and comparisons with, most every aspect of the asset allocation process.

Model Portfolios only show the current investment recommendations and allocation weights (AKA the proposed snapshot).

More differences between asset allocation Models and comprehensive asset allocation calculators are listed on the product description pages (click a link above to go there). The best list of differences are at the bottom of the comprehensive asset allocation software page (right above the disclaimer which is right above the pricing table).

Method #3: Use asset distribution tools that don't calculate, nor recommend, a mix of asset classes. In other words, you're just winging everything ad hoc. Most canned investment software uses this technique.

It doesn't calculate the recommended mix of asset classes, so using an investment fact finder to determine risk tolerance is not needed. The user is just guessing about both risk tolerance and the allocation mix that matches it.

It's not that common, but it's easy and efficient for financial advisors working with very small clients. It's the quickest way to show investors where they are and where the advisor wants to take them, in terms of asset classes and investment vehicles used to fund them.

As long as you're adding viable asset classes, then it's better than doing nothing, bank savings accounts, and better than trying to pick stocks / ETFs and/or trying to time the markets.

No rebalancing is needed because there is no recommended asset class mix to reference to.

Method #4: Refine any of the above method's results using portfolio optimization. This is sometimes erroneously referred to as Monte Carlo.

Doing this "correctly" substantially squeezes out risk (as measured by standard deviation), while not compromising returns very much. The more risk is squeezed out, the more efficient the portfolio is said to be per unit of return.

We've been using portfolio optimizers since they could run on 386 PCs in the late 80's. They were instrumental in developing both our Model Portfolios and comprehensive asset allocation software.

But we don't use them anymore because it's not needed once you see the same outcomes thousands of times over different market environments, and more than a couple of decades using Real World client money. Read much more about portfolio optimizers and why portfolio optimization is usually more trouble than it's worth.

This may help understand: The comprehensive asset allocation software was developed from working with asset-level portfolio optimizers all day long for over a decade.

Then, for smaller clients, this took too much time and work for too little money. So the Model Portfolios were created using an average of thousands of outcomes, to have something similar that's static, easy, quick, and simple to use.

How Asset Allocation Works

Different correlation coefficients between investments is why asset allocation works much better for sane rational individual investors than anything else ever invented.

When investments move up and down perfectly in sync with each other over a certain time frame, its correlation coefficient is 1. When investments move in the opposite direction with each other, its correlation coefficient is -1. Both of these scenarios never happen.

The average is around 0.7.

All it takes is for a new investment not to be over 0.9 to add diversification value to the portfolio as a whole.

This is the core concept of MPT (Modern Portfolio Theory), which started way back in the 1950's.

The point is to hold a balanced mix of asset classes that have both good returns on their own, and go up and down at different times relative to the other investments held in the portfolio.

Determining which asset classes to hold is an art, a science, and depends on the circumstances and goals of the investor.

The different asset classes can be looked at as ingredients that go into making a pie. Each ingredient individually tastes pretty bad. But when they're all put together in the right combinations, the result is a yummy pie.

Holding an diversified investment portfolio comprised of asset classes with healthy correlations to each other is just about the only way to reduce risk and volatility, while still realizing the returns that have any chance of outperforming the markets, enough of the time.

This is because whenever you check the portfolio's value, there's usually always something that's doing so well, that it keeps the portfolio as a whole from having negative returns, even when the US stock markets are down.

Here's a Word document with screen prints showing how the 22 asset classes we use performed during the worst month for the S&P 500 since 1999.

This is a rare event when EVERYTHING went down at once, which also happened in Sept - Oct' 08, and then from Jan to May '09.

In Sept '02, the S&P 500 lost 10.87%. The only asset classes that lost more were:

MSCI EAFE (Int'l All-cap): -11.04%
Russell 1000 Value Index: -10.49%
NASDAQ 100 Trust (Technology index): -11.65%
Morningstar Information Superhighway Index (Internet Index): -14.27%

The following asset classes made money that month:

Goldman Sachs Commodity Index (Tangibles): +4.57%
Barclays Municipal Bond: +2.19%
Barclays & S&P US Aggregate Bond: +1.62%
Barclays 1 -3 Year Bond: +0.81%
Barclays 3 Year Municipal Bond: +0.79%
Citicorp Non-$ World Bond (Int'l Bonds): +0.61%
Cash: 0.16%

Asset Allocation Facilitates the Ability to Provide Consistent Positive Alpha

Alpha is a portfolio statistic that measures risk-adjusted excess return. It quantifies an active investment manager's performance, compared to passive management. The calculations display a number that represents how much the active manager's returns exceeded its proper passive benchmark, adjusted for risk (measured by standard deviation).

In our investing Models, alpha is the value of selecting open-ended mutual funds, compared to using benchmark indices, to fund the asset classes; given the same asset class mix, over the same time horizon.

Both active and passive Models are included in our Model Portfolios. The passive Models are funded with benchmark indices, and/or index mutual funds, to provide the needed investing benchmarks.

Our Fee-Based Moderate Model's alpha is based on the same Model funded with appropriate benchmark indices, and is calculated and displayed on the second sheet to the right of the asset allocation calculator demo (this sheet is also pasted into the Word docx in the Model Allocation demo).

As you can see, it's always a large positive number. We don't think you'll find a higher alpha in time frames over five years from any other investment strategy.

The ability to consistently provide positive alpha for investors is the main goal of both investment managers and their clients (although most are unaware of its existence - they just want to do better than the markets).

Portfolio managers that can provide positive alpha consistently are earning the money investors pay them.

Without it, investors are paying and realizing little-to-no benefit. This is because they could have just bought no-load index mutual funds and realized more profit, and fewer losses, without having to pay investment management fees.

If an investor is realizing investment returns less than the markets, then the portfolio manager is probably providing negative alpha.

In this case, the investor is paying the advisor to make less money (than just using index funds), and assume more risks, by utilizing inefficient investment management strategies.

Unfortunately, most investment managers do not provide consistent positive alpha. This is usually not recognized, because few investors know how to calculate it, and/or correctly compare and quantify investment performance.

Many investment strategies beat the markets here and there in the short run. What's extremely difficult is to outperform the markets and provide positive alpha, most all of the time, and more than three years in a row.

Pure asset allocation strategies using mutual funds as the funding vehicles, is just about the only investment strategy that has the capability of doing this. When stocks, VA subaccounts, or ETFs replace the open-ended mutual funds, then this positive alpha always disappears.

About Using the Table of Historical Investment Returns Below

First, the Fee-Based Models are old news and the Hybrid Models are the latest and greatest thing. Starting January '17, everything is being benched from the Hybrid models. So if you're a money manager, don't use and ignore the returns of the Fee-Based Models. The only reason for using the Fee-Based Models going forward, is if you're a financial adviser, and for whatever reason, you don't want to use ETFs. Investors should use the either the Hybrid Models, ETF Models, or the No-Load Models (in that order - if you want what Investing Models do - which is give you extreme diversification to minimize risks).

Next, if you're comparing performance to another not-T4$ Model, then you should know that the chances that their returns have been linked to account for past investment vehicle changes, rebalancings, and asset class weight changes are slim to none, and Slim left town.

So once you're sure they have just been using past returns from their current hot picks, instead of properly accounting for for their losing picks along the way, then do not use returns below that are linked. Use the hypo returns below that have not been linked. This way, you are comparing apples-to-apples, and not something that looks good because it's fake, compared to something that is real. If there's returns on our site for only than three years, then they are not linked. Other than the Hybrid Models, only sets of returns showing five years or more have been linked.

We know that 99.9% of all money manager's returns have not been linked, because we tried to offer that as a service to advisers. It's a lot of work, so it's a lot of money, so nobody ever did that. Ones we've talked with in person had zero stomach for paying over $1,000 to shine the spotlight of truth onto their work - even if it looked like they've been outperforming their competition. If so, then that $1,000 paid to us to do the work would have been returned to them many times over, because they can use that to easily take accounts away from their competition. So it's yet another example of financial advisors being "penny wise and pound foolish."

So the bottom line is that is very rare that any return you see from a diversified investment portfolio of any kind is actual. So the standard language used to describe portfolio returns that are not linked, is hypothetical. The point is that hypo returns can be several times greater than actual returns, as you can see by comparing both from the same Portfolio Models below.

So the bottom line is to only compared hypo to hypo, and actual to actual. Since only ~0.1% of money managers maintain actual returns, you'll be comparing hypo to hypo most all of the time.

The longer the time frame, the more meaningful the comparisons are. The one-month figures (and YTD somewhat) are very volatile, and jump around from one extreme to the other at random. The ten-year, fifteen-year, and since inception columns are the most important time frames to compare.

Asset allocation provides the framework for competing with the markets on two fronts. First, the different correlation coefficients between the asset classes, and then funding the asset classes with indices, sufficiently lowers risk without sacrificing returns.

This is usually enough to beat the S&P 500. Comparing the rows on the table below showing the Benchmark Index Model vs. the S&P 500.

Next, this is given the necessary added boost when open-ended mutual funds are used that outperform their benchmark indices.

When this makes more money than the same investment strategy using indices (AKA the shell), it provides positive alpha. This is shown in the fourth row of the table below.

Active management in the environment of pure asset allocation usually outperforms passive management, when one can do even a mediocre job of picking mutual funds. This is contrary to what you've been brainwashed to believe, and is shown in the fourth row.

That's all that's needed for investment portfolios to outperform the US-based equity market indices, like the S&P 500 enough of the time.

The bottom-line for this past month is if you'd invested $10,000 in the S&P 500 since inception of 1/1/99; you'd have around $26,733.

If you'd invested $10,000 in our Fee-Based Moderate Portfolio Model (and followed the directions), you'd have around $44,149.

This 65% difference translates into having around two to three times the income to spend during retirement.

For those the like to compare things properly, if you'd invested $10,000 in the same Model allocation funded with benchmark indices since inception of 1/1/99, then you'd have around $28,420, vs. $44,149 in our Fee-Based Model; which is a 55% difference.

This shows the Real World results of long-term positive alpha, which is due to the value of our mutual fund recommendations.

This also proves, contrary to what you've been brainwashed to believe - that it is possible for an actively managed investment strategy to beat the markets (even after all fees and trading costs). This is shown on the fifth row below.

On the mutual fund picks page, you can see how our 22 mutual fund recommendations (and 22 ETF selections) have performed compared to their proper benchmark indices. You can also see the percentage of time mutual funds beat ETFs.

As you can see, our mutual fund screening process is usually able to select mutual funds that consistently outperform their benchmark indices (and ETFs and index funds) over most time horizons. This is where our consistently large positive alpha comes from.

A detailed explanation of how returns are calculated is in the Model Portfolios directions.

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Miscellaneous Pages of Interest
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Primer Tutorial to Learn the Basics of Financial Planning Software

About the Department of Labor's New Fiduciary Rules

Download Brokerage Data into Spreadsheets

How to Integrate Financial Planning Software Modules to Share Data

CRM and Portfolio Management Software

About Monte Carlo Simulators

About Efficient Frontier Portfolio Optimizers

Calculating Your Investment Risk Tolerance

About Discount Brokers for DIY Money Management

About 401(k) Plan Management

Investment Vehicle Used
(below)
Month of Jan '17 YTD (31 Dec '16 to 31 Jan '17) Last 12 Months Last 3 Years Annualized Average Last 5 Years Annualized Average Last 10 Years Annualized Average Last 15 Years Annualized Average Annualized Average Since Inception of 12/31/98
(using monthly compounding)
Hypo Hybrid Moderate Asset Allocation Model (contains both ETFs and mutual funds)
Hypothetical performance, as shown in the demo (which has returns and yields for all Models). Investment returns are not linked to account for past mutual fund switches, nor quarterly rebalancings.
1.22% 1.22% 21.22% 7.62% Not Available until February 2017 when returns will be linked like the regular Model Portfolios Not Available until February 2017 when returns will be linked like the regular Model Portfolios Not Available until February 2017 when returns will be linked like the regular Model Portfolios Not Available until February 2017 when returns will be linked like the regular Model Portfolios
Hypothetical Moderate ETF Asset Allocation Model
Hypothetical performance, as shown in the demo (which has returns and yields for all Models). Investment returns are not linked to account for past mutual fund switches, nor quarterly rebalancings.
1.11% 1.11% 20.50% 7.46% Not Available until February 2017 when returns will be linked like the regular Model Portfolios Not Available until February 2017 when returns will be linked like the regular Model Portfolios Not Available until February 2017 when returns will be linked like the regular Model Portfolios Not Available until February 2017 when returns will be linked like the regular Model Portfolios
Hypothetical Moderate Index Fund Asset Allocation Model
Hypothetical performance, as shown in the demo (which has returns and yields for all Models). Investment returns are not linked to account for past mutual fund switches, nor quarterly rebalancings.
1.47% 1.47% 14.57% 6.01% Not available due to lack of interest Not available due to lack of interest Not available due to lack of interest Not available due to lack of interest
Hypo Fee-Based Moderate Asset Allocation Model
Hypothetical performance, as shown in the demo (which has returns and yields for all Models). Investment returns are not linked to account for past mutual fund switches, nor quarterly rebalancings.
2.08% 2.08% 18.54% 7.53% Not Available - Some current recommended mutual funds don't have a five-year track record and past trades are not accounted for in the hypothetical Model N/A - Some current mutual fund picks don't have a ten-year track record and past trades are not accounted for in the hypothetical Model N/A - Some current mutual fund picks don't have a 15-year track record and past trades are not accounted for in the hypothetical Model N/A - Some current mutual fund selections don't have a 15-year track record and past trades are not accounted for in the hypothetical Model
Fee-Based Moderate Model Asset Allocation
This is the same Model as above, showing actual performance, with investment returns linked to account for past mutual fund changes, rebalancings, and everything else Finra needed to pass compliance.
2.08% 2.08% 12.84% 3.62% 7.75% 6.25% 8.17% 8.24%
Moderate Benchmark Index Asset Allocator Model
Same portfolio Model as above, but funded with indices. The difference is the value of active management - or mutual fund picking. No past index fund switches to account for (so there's no need to distinguish between hypo and actual).
1.54% 1.54% 14.98% 4.56% 7.10% 4.47% 6.55% 5.79%
Difference between the Actual Fee-Based Moderate Model and the same Portfolio Model Funded with Benchmark Indices
This is the correct apples-to-apples method of comparing investment portfolios, and shows the value of passive vs. active investment management strategies (derived only from the active mutual fund selections)

This is sort of the same thing as positive Alpha when it beats the benchmark index

This is also an example of what our portfolio benchmarking service is all about - comparing investment strategies properly

+0.54% (or 35% better) +0.54% (or 35% better) -2.14% -0.94% +0.45% (or 9% better) +1.78% (or 40% better) +1.62% (or 25% better) +2.45% (or 49% better)
Market Indices Month of Jan '17 Month of Jan '17 Last 12 Months Last 3 Years Annualized Average Last 5 Years Annualized Average Last 10 Years Annualized Average Last 15 Years Annualized Average Annualized Average Since Inception of 12/31/98
DJIA 0.62% 0.62% 23.89% 10.88% 12.28% 7.43% 7.39% 6.83%
NASDAQ 4.30% 4.30% 21.69% 11.01% 14.82% 8.59% 7.36% 5.34%
Russell 2000 0.39% 0.39% 33.53% 7.89% 13.00% 6.93% 8.59% 8.12%
MSCI EAFE NR USD 2.90% 2.90% 12.03% 0.71% 6.04% 0.97% 5.87% 3.64%
Barclays / S&P US Aggregate Bond Index 0.23% 0.23% -0.85% 1.91% 1.17% 4.01% 4.16% 4.43%
S&P 500 1.90% 1.90% 20.04% 10.85% 14.09% 6.99% 6.93% 5.45%
For Investment Advisors:

Difference Between the Actual Fee-Based Moderate Model and the S&P 500
This is not a proper comparison, like what's shown above with the Index Model, but it's the most popular thing people do.

+0.18% (or 9% better) +0.18% (or 9% better) -7.20% -7.23% -6.34% -0.74% +1.24% (or 18% better) +3.23% (or 59% better)
For Individual Investors:
Difference Between the Actual No-load Moderate Model Portfolio and the S&P 500
Caution! Up until now the comparisons were with the Fee-Based Model. This changed here to the No-Load Model - which is for individual investors.
-0.02% -0.02% -4.63% -5.71 -5.33% -0.06% N/A
No-load Models only go back to 1/1/'03. Since inception of 1/1/'03, the S&P 500 returned: 9.21%

+1.35% (or 15% better)

N/A
Investment Vehicle used
(above)
Month of Jan '17 YTD (31 Dec '16 to 31 Jan '17) Last 12 Months Last 3 Years Annualized Average Last 5 Years Annualized Average Last 10 Years Annualized Average Last 15 Years Annualized Average Annualized Average Since Inception of 12/31/98
(using monthly compounding)
More on Why Asset Allocation Using Mutual Funds Works Better than Market Timing and/or Stock / ETF Picking & Trading

If you like anxiety, worry, and your adrenaline pumping all the time over investment management, and realizing returns that are less than the S&P 500, then market timing and/or stock / ETF picking is for you. Many investors just can't get enough of playing this futile game.

The biggest reason advisors do this is because it's fun to play on Wall Street. Some advisors just need their jobs to be exciting more than they need to make a stable income and realize good returns for their clients. It's an exhilarating ego-boost to make a lot of money being correct on a stock / ETF bet. You feel like you've just won a sophisticated high-tech battle in an intellectual war with people that thought they were smarter and better than you.

The tortoise and hare analogy fits well here - where the tortoise (asset allocation) is slow and boring, but eventually wins over the exciting fits and starts of the hare (market timing and/or stock and ETF trading).

In order to make the big exciting money using market timing or stock picking techniques, you'd need to show a net profit on four decisions: You need to sell something (#1 - what to sell out of investments currently held) at the right time (#2), to drum up money to make new purchases, (#3 - what to buy) at the right time (#4).

Usually a "mistake" is made on one of the four decisions, and those losses negate gains on the correct decision(s). On top of that, one needs to make a major market timing call at least weekly to keep up with events.

Then on top of that, you'd have to subtract all of the trading costs, administrative costs, and taxes.

If all of that weren't true, then someone would have figured out how to make market timing or stock / ETF picking work by now, and then they would have their own popular crazed TV show.

Conclusions and Additional Information

Real World results reflect the most infamous (and misunderstood) asset allocation study.* It concluded that 91.5% of returns come from the asset allocation decision and not the security selection nor market timing decisions.

* Gary Brinson, Brian Singer, & Gilbert Beebower" Determinants of Portfolio Performance: An Update," Financial Analysts Journal Sept '91

In English - The behavior of asset classes, and their interaction with each other, are much more important long-term than choosing the best-performing securities to represent them, or when to trade them.

In other words, it doesn't matter too much that we pick mutual funds that usually outperform their proper benchmark indices.

What matters most is utilizing pure, optimized, and efficient asset allocation strategies; and then consistently picking mutual funds that are a close proxy to their asset classes (or just using index mutual funds).

The bottom-line is that asset allocation works much better for individual investors than anything else ever created.

You can hire us to manage your money, and/or advisers can hire us to manage their clients money, using our Model Portfolios and/or Asset Allocation Software for a flat $250 a month fee.

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