Using TIP$TER to Inform an Asset Allocation Plan
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TIP$TER illustrates risk and reward in how-might-it-affect-my-retirement-budget metrics. TIP$TER's crowning achievement, its Asset Allocation Risk/Reward Spectrum ChartTM, illustrates the risks and rewards of a whole spectrum of asset allocations (ranging from 0% to 100% equities) with this concrete, easy-to-appreciate metric. By illustrating risk and reward in this manner, TIP$TER's Asset Allocation Risk/Reward Spectrum ChartTM illuminates an investor's risk tolerance and inform an investor's most basic asset allocation choice: the split between equities and inflation-adjusted bonds.
For the last half-century, the most prominent graphical tool used to inform an asset allocation decision has been the Markowitz Efficient Frontier plot, an example, from Mathworks, of which is shown in the thumbnail to the left (click to see Mathworks article on the same subject):
In an efficient frontier scatter plot, each point represents the standard deviation and return of a particular portfolio over a historic time frame, and the collection of points represents all of the possible market portfolios (not including a risk-free asset) over that time frame. The efficient frontier represents that set of portfolios that provide the maximum return for a given amount of standard deviation risk. A rational investor with the benefit of a forward-looking efficient frontier chart (a crystal ball, really) would rationally choose one of the portfolios along the efficient frontier.
But the efficient frontier plot isn't very useful for a typical long-term investor planning for retirement. The efficient frontier plot measures risk in terms of standard deviations and reward in terms of annual return, which are abstract measures of risk and reward.
For the past half-century, financial planners, mathematicians and economists have struggled, with little success, to represent investment risk and return in ways that are meaningful to a typical investor.
The TIP$TER Asset Allocation Risk/Reward Spectrum ChartTM measures both risk and reward in concrete terms that any rational long-term investor would understand: in terms of how might it affect one's retirement budget. Even better, TIP$TER's Asset Allocation Risk/Reward Spectrum ChartTM contrasts those outcomes to the retirement budget that a risk-free portfolio would be projected to sustain.
By illustrating both the risks and rewards of a range of stock/bond asset allocations with concrete, how-might-it-affect-my-retirement-budget metrics, TIP$TER provides meaningful, never-illustrated-this-way-before insight into an investor's risk tolerance and what might be the most appropriate asset allocation (in terms of the split between equities and inflation-adjusted bonds) for that investor.
How to Use the Chart
To use the Asset Allocation Risk/Reward Spectrum ChartTM chart, first configure all of the inputs that you want to simulate. Then, click on "Click to test a range of asset allocations" button in the "Asset Allocation" input section:
In the chart area, click on the "Simulate Different Asset Allocations" button in the lower right corner:
Then wait for TIP$TER to complete the simulation.