Three other essential assessments

It is certainly most important to assess and compare portfolios in probability of meeting the investor’s future dollar goals. This is done by the Goal Frontier graph. And its comparison enables the investor to zero in on the best.

But there are three other important criteria or questions on which those best should be assessed and compared before the portfolio selection:

2. What are the probabilities for how far above or below the goal the dollar results might be?

For a simple illustration, a 5% probability of a shortfall of $100,000 is worse than a 10% probability of a shortfall of $1.

3. What are the dollar-value probabilities for the investment year by year along the way?

Seeing probabilities for dollar value year by year along the way is important in foreseeing when there may be shortfall risk, and can be important to investors who have dollar goals along the way, such as financing of children’s education.

4. What’s likely in paths of year-by-year ups and downs in dollar value along the way?

Seeing examples of likely sizes of ups and downs along the way can be very important to people who fear them.

In each of these criteria, to assess and compare portfolios most effectively on a graph, for each portfolio more than a dot is required. So for best clarity, it’s best to compare only two at a time — two selected from the Goal Frontier graph.

Surprisingly, portfolios that are very similar in goals-meeting probability can be very different in these other criteria. So it’s important to see some assessments and comparisons in these other criteria before final portfolio selection.

To illustrate, let’s go back to the investor’s original plan. On the Goal Frontier graph for that plan, portfolios 2 and 10 have virtually identical goals-meeting probabilities, so on the other questions, let’s compare these two:


As illustrated on the graph above, we’ll represent the more-aggressive portfolio 10 as Port A in red, and the more-conservative portfolio 2 as Port B in blue.


How far above or below the final goal?

To assess and compare portfolios in answer to this important question, we’ll show each portfolio’s final-value probabilities like this graph for Portfolio A:


On this graph, height is dollar value that may be left at the end of the plan. Higher is better.

At various heights, width of the shape shows likelihood of final dollar value at that height. At heights where the shape is wider, final dollar value is more likely.

(This graph is a probability distribution, turned sideways for two reasons: vertical-axis consistency with related graphs that follow, and application of the common intuitive assumption that “higher is better.”)

The investor can see that there are definite probabilities of a final value higher on this graph, up toward 2.0 to 3.5 million or even higher. The 15% above the graph means there’s 15% probability of final value even higher than the top of the graph.

But lower where the shape is wider, in the range from 1.5 million down close to zero, the final result is more likely to be.

Multiply understanding and value of this graph with graphread 

With Pathfinder interaction tools, on this graph you can scroll up to the height of the goal, or scroll to target heights above or below the goal. Whatever final-value height you scroll to, a horizontal white “goal line” crosses the colored shape. And just above the goal line, a colored number appears revealing the probability the final result will be at least that high.

Here on the graph below, the investor has scrolled up to his final-value goal of $600,000 for his SPIA, 0.6 million on the vertical axis:


At the goal-height the investor scrolled to, the white goal line crosses the red shape, and just above the goal line a red number reports that according to the analysis, this red portfolio offers probability of a final result that high of 81%.

Compare portfolios in how far above or below the goal the result may be

Remember that the portfolios we are now comparing are portfolios 10 and 2 for the investor’s original plan, for which these two portfolios offer virtually identical goal-meeting probabilities. Look at how vastly different they are  in probabilities for how far above or below the goal their results might be:


For the Goal Frontier’s portfolio 2, labeled blue Port B on this graph, almost all the width is between $0.4 and $1 million, with just tiny probabilities a little bit lower or higher. So according to the analysis, with this portfolio what’s left at the end is almost sure to be in this range.

For the Goal Frontier’s portfolio 10, in this graph labeled red Port A, the red shape shows radically different possibilities than tose for the blue, far more spread out — mostly on the high side. What’s left at the end of the plan could be up to $3.5 million,  or even higher.

But the red shows this portfolio also has possibilities of lower than the lowest for the blue. On the low siide, the final result for the red could be anything short of what the investor needs for his SPIA, down to zero.

For fuller comparison of the portfolios, use graphread

In Pathfinder, you can use interactive graphread for fuller comparison of the portfolios. Here the investor has scrolled to his final-value goal to compare the portfolios in probability of a result at least that high:


Sure enough — for delivering the $600,000 this investor wants for his SPIA, these two portfolios offer equal probabilities, 81%, just as shown on the Goal Frontier.

But look at how very different they are in how far above or below that goal the results may be. 

Which of these would you choose? Some parents would be so attracted by chances of leaving millions for the kids, they’d be willing to take a little chance of tight money in their old age, and go with the red portfolio. Other folks who are more concerned about their own finances in their older years would choose the safer portfolio in blue.

I’d sure want to have this second graph so I could make an informed choice.

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