The wizard tailors its suggestions based on your responses to four essential questions, ensuring that the listed portfolios align perfectly with your financial goals. Why are these inquiries important?
Four Factors To Determine Your Financial Goals
1. Account Size
Based on the account size, the wizard provides different portfolio choices. Some strategies involve just a few ETFs and require only a small initial investment. Others may need more money because they invest in different assets, each possibly having a minimum investment requirement. This happens because some stocks are expensive, and the portfolio has rules about how much to invest in them. For instance, you might need to invest 10% or more of your capital in these expensive assets for the strategy to be effective. As a result, these options are suitable for larger account sizes.
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2. Time Horizon
Aggressive portfolios may promise higher returns, but they also come with significantly greater volatility. For these portfolios, a longer time horizon is essential to recover from market downturns or other events that might result in investment losses.
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3. Risk Tolerance
There is no right or wrong answer to the inquiry about your risk tolerance, so when in doubt it is best to opt for a portfolio with a lower risk tolerance. It is well known in both, investing and psychology, that losses are more painful than making the same amount of money feels good. Hence, there is nothing worse than starting aggressively and then shifting to a more conservative approach after experiencing painful losses. Because in this scenario you get the worst of both ends. Therefore it is beneficial to be sure about your risk tolerance. Keep in mind that while we use Monte Carlo simulations to estimate the potential paper losses for our portfolios, there are no guarantees that investments will remain above this value.
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4. Tax Status:
The last parameter is the tax status of your investment. Some of our portfolios utilize hedging techniques to enhance tax efficiency. However, these techniques may not be necessary in tax-deferred retirement accounts. Knowing the correct tax status of your investments ensures our wizard identifies the ideal options for you.
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The Wizard's Choices
Upon completing the wizard, you receive a list of the five most suitable portfolios, sorted by their pessimistic return estimates. These estimates are derived from Monte Carlo simulations of the portfolio’s historical returns at the 5th percentile. Over longer investment periods, this value aligns with the backtested average return. However, for shorter investment horizons, higher volatility has a larger impact, leading to lower expected returns. Consequently, shorter investment periods call for safer portfolios with lower volatility.
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