Modeling the future

Financial decisions are best made after examining the ‘what ifs.’

Sep 25, 2013 | Our Perspectives Archive

Suzanne Wuebben
Executive Director, Portfolio Construction
Should you sell this stock? Create that trust? Retire today? Wait six months? These, like most financial questions, all involve trade-offs—which can make it difficult to make a timely decision.
Moreover, in the aftermath of the financial crisis, you may well wonder what information you can reliably use as a foundation.
Instead of struggling for answers, consider modeling.
Preview potential outcomes before you set them in motion

While no one can predict the future, modeling offers meaningful “what-if” scenarios that can give you insight into the potential impact of various choices you might make.
We run thousands of simulations that integrate and evaluate multiple variables simultaneously against numerous financial goals. In addition to capital market assumptions, we look at a host of factors that can influence portfolio performance and wealth over time. Two of the most significant are your individual spending rate and any illiquid asset you may have.
Based on our history of helping individuals and families protect and manage wealth, we know that how much you spend, particularly in the early years, can be as critical to preserving your wealth as your asset allocation strategy.
We also look at what percentage of your holdings is illiquid. Many of our clients hold alternative assets, such as hedge funds and private equity, that tend to be less liquid. Also, art, real estate, antiques, yachts, aircraft, etc., cannot be readily converted to cash. This can have a pronounced effect on future goals.
Additional factors we examine include:
  • The impact of a concentrated single stock position
  • The potential impact of taxes
  • The types of assets you hold
  • Whether your assets are in taxable or tax-deferred accounts such as IRAs or 401(k)s
Complex analysis for complex risks

Given the market rupture of the past few years, our models also aim to assess the likely impact of complex risks that could occur:
  • Rare events (so-called fat tails and black swans)
  • Non-normal market blowups (similar to what we saw in 2008)
  • Non-linear correlations (when asset classes that usually don’t rise and fall in tandem suddenly do)
  • Contagion risk (the chance of financial risk spreading; for example, from one part of the world to another)
Using this more robust data set, we create a range of scenarios across a 10-, 15- or 20-year period that can help you evaluate different choices, weighing the trade-off, for example, of seeking greater rewards versus spending less or reducing your risk. 
The right tools for sound decisions
J.P. Morgan can help you determine any number of important decisions, including:
  • How varying levels of risk can impact the amount of reward
  • The probability of failure in various scenarios
  • The difference a 3% versus 4% spending rate would make on your long-term goals
Taken together, these scenarios show you more clearly the trade-offs inherent in every choice you make and how likely you are to achieve the goals you have identified. In these uncertain economic times, insights like these can prove invaluable.
To learn more about how modeling can help with your specific financial decisions, we invite you to contact us, and a J.P. Morgan representative will be in touch with you.
The material contained herein is intended as a general market commentary. Opinions expressed herein are those of Suzanne A. Wuebben and may differ from those of other J.P. Morgan employees and affiliates. This information in no way constitutes J.P. Morgan research and should not be treated as such. Further, the views expressed herein may differ from that contained in J.P. Morgan research reports. The above summary/prices/quotes/statistics have been obtained from sources deemed to be reliable, but we do not guarantee their accuracy or completeness; any yield referenced is indicative and subject to change. Past performance is not a guarantee of future results. References to the performance or character of our portfolios generally refer to our Balanced Model Portfolio constructed by J.P. Morgan. It is a proxy for client performance and may not represent actual transactions or investments in client accounts. The model portfolio can be implemented across brokerage or managed accounts, depending on the unique objectives of each client, and is serviced through distinct legal entities licensed for specific activities.
The modeling referenced herein makes assumptions concerning, but not limited to, particular J.P. Morgan and/or client expectations in terms of returns, time horizons and risk tolerance.  Assumptions vary and as a result, the outcomes of the analysis will vary.  Modeling also includes limitations, not the least of which is that the lifestyle expectations of the client for whom a modeling analysis is created, can change and so the outcome of a modeling exercise is only as good as the information considered at a particular point in time.  For this reason, modeling is one possible tool for use by clients, but it is not the only tool they should consider.  For clients’ particular investment needs, they should speak with their J.P. Morgan representative as well as their personal tax and legal advisors when planning for their future needs.
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