Asset allocation and portfolio rebalancing is an important topic between financial advisors and their clients. As the clients move though different life stages, the suggested allocation for his or her investment portfolio is likely to change. This post will discuss how to illustrate the client‘s investments shifting portfolio models overtime in TOTAL Planning Suite.
Let’s look at an example of a client who is 45 today and is planning to retire at 65:
- At 45, he is currently has a moderately aggressive asset allocation mix as he has a great job, is adding to his assets and looking to build up his wealth using a growth portfolio.
- At 55, he has retirement on his mind and wants to continue growing his wealth, but not willing to subject his assets to same level of risk as 10 years ago, and moves to a more balanced income and growth portfolio.
- At 65, he is retiring and moves from a balanced portfolio to an income portfolio.
This can be modeled in TOTAL Planning Suite by taking advantage of the ability to change portfolio returns at any age using the Asset Rate Changes tab. For the sake of simplicity, let’s say this client is invested in a mix of mutual funds, all falling under the Equity/Other asset type. As his asset allocation changes overtime, the overall rate of return on his portfolio decreases. The portion of the return made up of appreciation and capital gains reduces, while the portion made up for interest and dividends increases.
- The client’s current asset mix has a projected return of 8.50%, which is made up of 1.5% dividends, 2.5% capital gains and 4.5% appreciation. This information is entered on the main Asset input.
- At 55, the balanced asset mix has a projected return of 7%, made up of 1% interest, 2% dividends, 2% capital gains, and 2% appreciation. This is entered as the first change on the Asset Rate Changes tab, as shown in the screen shot below. This will change the rate of return on the client’s entire portfolio of mutual funds. This return will continue until the next entry in the table.
- At 65, the income portfolio asset mix has a projected return of 5.5%, made up of 2% interest, 2% dividends, 1% capital gains and .05% appreciation. This is entered as the second change on the Asset Rate Changes tab. This return will continue throughout the projection.
Shifting Portfolio Models – Input:
Shifting Portfolio Models – Reports: Note the changing return and return mix at age 55 and 65: