This article will help you understand the rate of returns used by the Your Best Life module.
Rate of Returns
To understand the rate of return used in the calculation, please note that they are:
- per asset ( accounting for Asset Class, Sector, Region)
- per time scale (0-10, 10-20, 30+ years)
It is important to note that these figures, and the standard deviation, are just the inputs for each year; the Monte Carlo runs multiple (1,000) simulations. Therefore, it will not be the same as applying a flat return on each asset class.
- Take the previous year’s balance
- Split it into the asset class breakdown based on their risk group - this is equivalent to having a yearly rebalance on your portfolio
- Apply that year’s expected returns per asset class (this is the monte carlo component)
- Subtract the fees
- Apply the tax rate
- add that sum to the previous year’s balance to get the current year’s balance AND apply inflation
Returns to be multiplied by 100 for %, for example, 0.012728 for FI Gov Domestic is 1.27%
(Click image to expand)