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Submitted by: Puthan(VJ) Vijayan
Puthan(VJ) Vijayan is the Principal member of PMV Investment Advisors, LLC. The firm is a Registered Investment Advisor. VJ is a Certified Estate Planner and Registered Financial Consultant, with over 15 years of planning and investment experience.
THE FULL ARTICLE IS IN THE JOURNAL OF PERSONAL FINANCE,A RESEARCH PAPER FOCUSED JOURNAL SPONSORED BY THE INTERNATIONAL ASSOCIATION OF REGISTERED FINANCIAL CONSULTANTS(IARFC);VOLUME 3 ISSUE 4 2004;
AUTHORED BY MICHAEL D EVERETT PH.D.,MURRAY S ANTHONY PH.D.,BOTH FROM THE EAST TENNESSEE STATE UNIVERSITY;
ABSTRACT:
'MANY MIDDLE AGED INDIVIDUALS HOLD A PATCHWORK OF RETIREMENT PLANS,INCLUDING PENSION,DEFERRED COMPENSATION AND OTHERS.TO OFTEN THESE PLANS OFFER LIMITED INVESTMENT OPTIONS AND IMPOSE CONSTRAINTS UPON ASSET DIVERSIFICATION;'
THE AUTHORS HAVE DEVELOPED 'A PROPRIETARY SPREADSHEET DIVERSIFICATION MODEL TO HELP INDIVIDUALS ''OPTIMIZE ASET DIVERSIFICATION ACROSS AND WITHIN ASSETS CLASSES ACCORDING TO MODERN PORTFOLIO THEORY'
THE MODEL WAS TESTED ON A REALISTIC EXAMPLE-PROFESSIONAL WOMAN,PETROLEUM SCIENTIST WORKING FOR A MULTI NATIONAL CORPORATION.
INTODUCTION:
'OVER THE LAST FEW DECADES ACADEMIC MODELS HAVE ADVOCATED BROAD DIVERSIFICATION OF RETIREMENT ASSETS ON A BUY AND HOLD BASIS''MODERN PORTFOLIO THEORY' SAYS THAT DIVERSIFICATION BETWEEN CASH,FIXED INCOME,EQUITIES AND REAL ESTATE MAXIMISES RETURN FOR A GIVEN LEVEL OF RISK.'THE IBBOTSON SCHOOL EMPHASIZES DIVERSIFICATION IN TERMS OF INVESTABLE INDUSTRIAL WORLD ASSET CLASSES.'
'OTHERS HAVE EMPHASIZED FEASIBLE DIVERSIFICATION INTO BONDS,STOCKS,AND REAL ESTATE USING BROAD,LOW COST INDEX FUNDS'
'THESE APPROACHES ALSO ASSUME EFFICIENT FINANCIAL MARKETS AND THUS ENCOURAGE BUYING AND HOLDING VERSUS MARKET TIMING'
BUT PRE-RETIREES CONTINUE TO HAVE A COMPLEX PATCHWORK OF RETIREMENT PLANS,'WHICH MAKES DIVERSIFICATION DIFFICULT.'ALL OF US HAVE COBINATION OF PRIVATE PENSION,TAX DEFERRED 401K,403B,IRA'S,PERSONAL ANNUITIES AND PRIVATE SAVINGS PLANS.EACH OF THESES COME WITH ITS OWN INVESTMENT OPTIONS AND CONSTRAINTS.
'THUS MANY INDIVIDUALS WOULD HAVE DIFFICULTY KNOWING THE DIVERSIFICATION OF THEIR RETIREMENT PLAN ASSETS,PLANNING A MORE BALANCED DIVERSIFICATION,AND IMPLEMENTING THOSE PLANS.'
AS A FINANCIAL PLANNER MYSELF,I HAVE NO FOUND ANY PLAN WHICH ADDRESS THE PROBLEM OF HELPING YOU DIVERSIFY OVER AND WITHIN 'BROAD RANGE OF ASSETS.MOST JUST PROVIDE A PIE CHART OF DISTRIBUTION BETWEEN CASH,BONDS AND STOCKS.
THE BASIC SPREADSHEET APPROCAH:
DATA ENTRY SPREADSHEET- PERSONAL DATA WITH RETIREMENT ASSETS BY MAJOR ASSET CLASS;ASSET DIVERSIFICATION BY DOLLAR AND PERCENTAGE BY EACH ASSET CLASS,ADDITIONALY TOTAL ASSETS;STOCK ALLOCATION BY STOCK CLASS;
THEN FOLLOWED WITH WRITTEN REPORTS ON THE CURRENT DIVERSIFICATION,FOLLOWED WITH RECOMMENDED DIVERSIFICATION FOR HIGHER INCOME WITHIN YOUR RISK TOLERANCES;
EXAMPLES OF PERSONAL DATA ENTRY TABLE:
LOW EXPECTED HIGH
'AGE WHEN RETIREMENT START'
'AGE RETIREMENT EXPECTED TO END'
'TARGET BEFORE TAX RETIREMENT INC'
'CURRENT EST VALUE OF PENSION'
'ADDITION TO PENSION EACH YR'
'RANGE OF YRLY SAVINGS FROM INC'
'OTHER YRLY ADDITION TO ASSETS'
'EST YRLY SOCIAL SECURITY INCOME'
THIS DATA ENTRY IS FOLLOWED BY:
FINANCIAL DATA ENTRY TABLE
CASH AND CASH EQUIVALENTS
LONG TERM FIXED VALUE FUNDS
REAL ESTATE AND REAL ESTATE FUNDS
STOCKS AND STOCK FUNDS
'THE ASSET DIVERSIFICATION SPREADSHEET'
ASSET DIVERSIFICATION PRESENT PLANNED
GOALS DIVERIFICATION
(1) (2) (3) (4) (5) (6)
ASSET PRESENT PRESENT PRESENT PRESENT PLANNED
FUNDS % FUNDS % REALLOCATION
DEDICATED DEDICATED INVESTED INVESTED OF ASSETS
TO ASSET TO ASSETS IN ASSETS IN ASSETS
CASH &
CASH
EQUIV
LONG
TERM FIXED
REAL
ESTATE
STOCKS
TOTAL
EQUITY IN
HOME
'STOCK ALLOCATION-TABLE ON STOCK DISTRIBUTION'
'GOALS,PRESENT DISTRIBUTION AND NEEDED DISTRIBUTION'
U.S. OUTSIDE OF U.S. TOTAL
STOCK TYPE
GOAL %
GOAL $
PRESENT
INVESTED
NEED TO
INVEST
'STOCK ALLOCATION-TABLE ON SOURCES OF MONEY'
SOURCES OF MONEY
PENSION IRA 401K FAMILY CHECK
MONEY
AVAILABLE
PLANNED
TO INVEST
'EXPERIMENT WITH DIFFERENT INVESTMENTS'
U.S.-INDEX
INTERNATIONAL
PLANNED DISTRIBUTION OD STOCK FUNDS OVER STOCK TYPES
STOCK LVAL LGWTH MCAP SCAP EUR JAPAN EMG CHECK
TYPE
NEED
TO
INVEST
INVEST
PLANS
CONCLUSIONS:
'BASIC SPREADSHEET PROGRAMS CAN PROVIDE USEFUL ASSET ALLOCATION AND EVEN MORE COMPREHENSIVE RETIREMENT PLANNING MODELS.'
'THE MODELS PRESENTED HERE INVOLVE VERY SIMPLE ARITMETIC PROGRAMING
WITHIN THE ABILITY OF MOST SPREADSHEET USERS, ALTHOUGH THE MODELS MAY REQUIRE CONSIDERABLE TIME TO CONSTRUCT'
'THUS,BAISC SPREADSHEET PROGRAMS MAU CONTINUE TO CONSTITUTE A USEFUL PLATFORM FOR ASSET ALLOCATION AND THER RETIREMENT PROGRAMMING'
USERS CAN REDUCE THE TIME AND TEDIUM OF DEVELOPING THEIR OWN SPREADSHEET BY MODIFYING BOILERPLATES LIKE THE ONE DEMONSTRATED IN THIS PAPER.'
'BASIC SPREADSHEET PROGRAMS-ALLOW INDIVIDUALS TO FOLLOW THE PROGRAMING TO DOUBLE CHECK RESULTS AND THUS GAIN MORE CONFIDENCE IN THEM'
'THIS MAY BE PARTICULARLY IMPORTANT FOR LOOKING AT THE ASSUMPTION BETWEEN RATES OF RETURNS AND PROJECTED RETIREMENT INCOME FROM DIFFERENT ASSETS AND PORTFOLIOS.'
'SPREADSHEETS ALSO ALLOW INDIVIDUALS TO MODIFY THE PROGRAMS FOR THEIR OWN SPECIFIC' CIRCUMSTANCES AND NEEDS.
PUTHAN(VJ) VIJAYAN CEP RFC MBA
PMV INVESTMENT ADVISORS,LLC
FIDUCIARY ADVISORS
INDEPENDENT FEE BASED CAPITAL & WEALTH MANAGEMENT
20720 WATERTOWN ROAD
SUITE 106
WAUKESHA,WI 53186
262 754 1672
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