Tool to plan portfolio growth

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renegade06
Posts: 242
Joined: Sat Jan 12, 2019 3:00 pm

Tool to plan portfolio growth

Post by renegade06 » Mon Jun 29, 2020 10:59 am

Hello all - I am looking at online planning tools to predict the growth of my portfolio over time. I’ve included an example from Smart Asset below.

I am trying to understand the “rate of return.” Do these calculators assume a growth of say 5% YoY or an average growth rate? I’d like to just get an accurate predictor for planning purposes. Thanks!

https://smartasset.com/investing/invest ... QuW1OaWEqR

02nz
Posts: 4931
Joined: Wed Feb 21, 2018 3:17 pm

Re: Tool to plan portfolio growth

Post by 02nz » Mon Jun 29, 2020 11:03 am

It should be year over year. Test for yourself: Start with $10K, 5% growth, no contributions, 2 years. You should get $11,025, not $11,000.

When projecting your portfolio, it's a good idea to use real not nominal returns. So maybe 4.5% instead of 7%, for example. This gives you a more meaningful result and is also more relevant for projecting taxes on distributions from your portfolio, since income tax brackets are indexed for inflation.

dbr
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Joined: Sun Mar 04, 2007 9:50 am

Re: Tool to plan portfolio growth

Post by dbr » Mon Jun 29, 2020 11:07 am

I would say "rate of return" in that model is the fixed annual return for your investments. In the case of a fixed, constant return both the arithmetic average return and the compound annual (average) growth rate are the same thing. Those numbers are different if the return is variable from year to year.

Using a simple fixed rate of return is too simple for financial planning in the real world. It does not take into account the variable return produced by real investments. Even savings accounts and CDs have variable return because the interest rates change over time.

A better model is illustrated by something like www.firecalc.com and the many similar models that make statistical projections. FireCalc solves the problem (for better or for worse) of guessing the return by using actual returns and inflation over the last century or so. Other models using Monte Carlo methods require guessing a statistical distribution of returns.

The point is that the output needs to be a distribution of possibilities and not a single number. Anything less than this is too simple and misleading. It is misleading in a really bad way, which is that it ignores risk.

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Tyler9000
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Joined: Fri Aug 21, 2015 11:57 am

Re: Tool to plan portfolio growth

Post by Tyler9000 » Mon Jun 29, 2020 11:08 am

Try this Portfolio Growth calculator:
https://portfoliocharts.com/portfolio/portfolio-growth/

Enter your specific portfolio, starting amount, and annual contribution, and it will calculate the real-world inflation-adjusted results using every annual start date since 1970. That will show the full range of outcomes and help you plan conservatively even if future returns are below the historical average.

Topic Author
renegade06
Posts: 242
Joined: Sat Jan 12, 2019 3:00 pm

Re: Tool to plan portfolio growth

Post by renegade06 » Mon Jun 29, 2020 11:24 am

Thanks, everyone! I will check these out

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