Problem with Replication

[Paul]

I'm simply trying to find best fit indexes for funds that aren't
imported from the Steele data: FNITX and NEFZX. (I'm not sure why
they wouldn't be in there...tons of others are there from the original
Steele import.) I've got details from Morningstar about the two funds
but haven't had any luck making an index. Also, the client already
has about 4% in IWN (an ETF) so I'd like to add that in as well. Any
tips?

In summary, the SIM I'm trying to build is to replicate the following

IWN 4%
INDZX 10%
NEFZX 34%
JAOSX 17%
FNITX 24%
BPTRX 10%
Cash 1%

The only missing pieces (that I haven't created) are the Cash, IWN,
FNITX, NEFZX.

THANS!

[DoriceM]

QUICK NOTE: See page 22 of the "Pro" Software User Manual for step by
step instructions on creating a Managed SIM. See page 27 for Selecting
Best Fit Index; page 64 for creating User Indexes. Since you've
already located the Morningstar Data on the funds, these instructions
from the Manual should be all you need.

Browse this User Group for other Discussions or Documents on this
subject.

[Mitch]

All mutual funds have benchmarks. if all other resources have been
exhausted, then go to the prospectus to find it. As for Cash, it would
be for you to determine the appropriate index; use a money market
index or a t-bill index your choice.

If you can't find a mutual find in Steele data imported into the
Planning Platform, the most likely reason is that it is not quite 5
years old.

On Feb 16, 2:12 pm, Paul <p...@providenceadvisors.com> wrote:

[Paul]

OK. Got it figured out...and boy was I surprised. Unless I'm
building the simulation incorrectly, I can't create a ETF portfolio
that has a higher probability of success than his current Ameriprise
portfolio.

[Mitch]

Building a portfolio of ETFs can always have a better outcome;
whatever the measurement. Whether it is the overweighting of indexes
in an asset class that performs better over the historical period used
in the study or properly communicating the potential effects of a
negative alpha indexes will be superior; indexes are superior to
active management. (Random Walk and Efficient Markets dictate this)

I am not sure how you portrayed the current portfolio but if you used
a + alpha in your Managed SIMs or selected an incorrect index, you
will find that the current portfolio will provide superior results.
Even if you neutralized the alpha and found that a particular
overweighting on an asset class is producing optimized results, test
the scenario over a few different time periods and you will find that;
different times different results.

Good Luck.

[Paul]

I had to plug in alpha, beta, risk free, etc. numbers (that I gleaned
from Morningstar) into the Managed Sims because the software won't
allow you to go forward without them. It's easy using the software
when you have the symbols "in the system" from Steele. However,
creating indexes on your own gets really tricky.

> > > THANS!- Hide quoted text -
>
> - Show quoted text -

[Mitch]

The best way to do this is to create your own Managed SIMs and then
add those to a portfolio of SIMs. Why would you simply place the alpha
in the SIM when it means you will assume the manager will out perform
the chosen index each and every year?

The alpha input is there for those planners looking to show the
effects of a positive alpha and a negative alpha. Since Active
Managers do not outperform their benchmarks consistently over long
periods, return the the mean would dictate that a manager will
underperform in the future.

this being said, if you are going to show positive alpha for active
managers, you should always show negative alphas. Run 2 different
Retirement Plan Audits.

Please keep in mind the MCP Premium Planning Platform is a canvas of
analytical tools that provide you (the financial engineer) with which
you need to analyze investments and portfolios in the manner you see
fit. Software can never serve up the best planning, just the best
planning tools. It's all about education; the more you have, the more
you can apply, the better your analysis!

[Paul]

You said, "Why would you simply place the alpha
in the SIM..." Because the software won't let us leave them blank.
Why?

> > > - Show quoted text -- Hide quoted text -

[Mitch]

You may not realize it but 0 is also an acceptable input. An input of
0 is a neutral value. To better understand the inputs of the software,
you will need to study and understand the Modern Portfolio Statistics
used. I would suggest finishing the Personal Retirement Planning
Specialist course.

By the way, I am thinking about having a Live course next month. I
will look for interest this week.

Mitch

[Paul]

So for now it would be neutral to just enter 0 in all the blanks?

[Mitch]

I am sorry but I can't tell you how to plan for this client since I am
not an Investment Advisor. What I can tell you is that the Software
Manual describes the input fields and it is for you to decide what
value is best for the financial modeling scenario you are using.

I believe that it would be best for you to study the MPT Statistics
indepth now and wait no longer, your clients are counting on you! I
know I can sound preachy but I only mean that you shouldn't wait any
longer to learn what you should already know. Alpha, Beta and R-
Squared are basic statistical terms that every financial advisor
should understand.

Your clients will thank you for being the best advisor you can be. You
have the tools and the ability!

[Paul]

You're right...I need to get my arms around it...and this software!
Weaknesses really show when trying to "create" with your software.
It's not for the novices out there! That will probably keep it
forever out of the hands of the majority of advisors. You must have a
strong working knowledge of the concepts...not just an awareness of
them.

Zeros definitely aren't neutral when they are plugged into the alpha,
beta, and risk-free rate. The Ameriprise portfolio comes out -.99
when I do!

Thanks!