Choosing a Portfolio Goal
What is your motivation for investing? Is it to provide for your retirement? To fund a down payment on a house? To save for a loved one's college expenses? If you are like most people you are investing towards a specific goal. Using the Portfolio Goal feature will allow you to estimate your progress towards that goal.
There are two types of Goals you may set for your portfolio:
- Event Goal: Project how much money can be saved by a certain date. Use this goal type for a retirement fund or a college fund. You will be asked to enter the date of the event you are saving for.
- Purchase Goal: Project how long it will take to save a certain amount of money. Use this goal type for a down payment. You will be asked the amount of money you are trying to save.
Useful Tip: Portfolio Goals may be set for combined portfolios. If you have several brokerage accounts that you track using Icarra it might be useful to set a goal for the combined portfolio.
Return Assumptions
Future returns are estimated based on certain assumptions: Deposits per year, returns per year, and portfolio standard deviation. If your portfolio has at least one year of history these assumptions can be estimated automatically. If you wish to change the own assumptions or if your portfoio has less than one year of history then you may enter your own return assumptions.
After setting the goal type you will be given an opportunity to enter your own return assumptions. If you wish to change some assumptions then enter a value in the appropriate field, otherwise leave the field blank in which case the value will be automatically calculated.
Setting return assumptions are a personal choice. Icarra does not provide market forecasts.
Inflation
Inflation is a key component of long term investing. Future portfolio values are also listed in today's dollars using an assumption of 3% inflation.
Return Projections
Portfolio returns are projected using a technique known as Monte Carlo Analysis. Essentially this method performs a random sampling of possible future outcomes based on the portfolio return assumptions. Using Monte Carlo Analysis to estimate portfolio returns has several problems. For example, Monte Carlo analysis will not forecast major economic events like hyper inflation, depressions, wars, etc. Monte Carlo also analysis also asumes that portfolio returns form a bell curve which is not a valid real life assumption. Please keep in mind that Monte Carlo Analysis only povides an estimated range of possibilities. Actual portfolio returns may be wildly different than the projected returns.
Notes
- The random nature of Monte Carlo analysis means your goal results will be different each time you view your goal.
- Purchase goals will calculate up to 100 years. If the goal is not met after 100 years then the monte carlo analysis will end.
- A portion of your portfolio's actual returns will be displayed along the projected returns. If your portfolio's actual returns cover a shorter period of time than projected returns then it could be difficult to distinguish between the two sets of data.