Risk and return. They’re the fundamental units of measure of any investing strategy. They’re also crucial to understanding – and measuring – your portfolio. But how do you know what the appropriate balance of risk and return is? And how can you quantify them with respect to your own portfolio?
Today, we launched a brand new feature called Investment Checkup. Finally, an investment tool that helps you measure risk and return for yourself and see if you’re truly on track.
After you link your accounts, we run thousands of Monte Carlo simulations that show your strategy’s expected return. We then run our diagnostic “Advice Engine” on your portfolio to identify key risks. Finally, we tell you how putting the risk and return into a more appropriate balance can improve your portfolio’s performance.
Our Investment Checkup was expressly designed around the needs of our users. A look across Personal Capital user data shows the following common investment mistakes:
- Inefficient Allocations – The vast majority of our users take more risk than needed given their expected return. 80% of our users have a portfolio allocation that contains 10% more risk than a portfolio with a more efficient blend and same expected return. 40% are taking 20% more risk.
- Too Much Cash – Leaving your portfolio in cash leaves potential investment returns on the table and may mean loss of purchasing power. Our average user has 15% idle in their investment accounts (even the most conservative portfolios shouldn’t have more than 10% in cash)
- Too Many Mutual Funds – Mutual funds tend to have poor performance, high fees and are not tax efficient. More than 50% of our users have the majority of their wealth in mutual funds.
The Investment Checkup enables you to view a complete picture of your entire financial life in one place—and determine exactly what you should do with your investments to avoid these mistakes, maximize gains and meet your personal financial goals in the decades between now and retirement.
So how does the Personal Capital Investment Checkup work?
Setup. First, make sure your investing accounts are linked to your Personal Capital Dashboard. Then, navigate to Investment Checkup on the “Investing” dropdown list on the top navigation bar of Personal Capital. If you’re a new client, we’ll prompt you to fill out some questions in your Investment Profile – which help to make sure that our suggested target portfolio is tailored to your life.
Calculations. To generate the best risk and return combination, it’s important to be on the right place on the efficient frontier given your risk level. (Don’t know what the efficient frontier is? We’ve got an educational video that explains it). We look at your risk profile and long term plans to calculate the right mix of asset classes that would optimally place you on the efficient frontier. Then, because you’ve linked your portfolio, we calculate how closely your strategy maps onto a target allocation and how much your current portfolio is costing you in fees.
Output. Finally, we show you results. As shown in the chart below, we kick off by sharing your optimal allocation — your “Target Allocation” — and based on our calculations, how closely your current allocation maps onto your Target Allocation. We illustrate this as literally as possible: how much money you’d gain by shifting strategies.
Then, we show you more detail about the results of our comparative analysis of your portfolio versus an optimized portfolio. Specifically, we show how the allocation, historical performance, future projections and risk and return stack up. The image below shows how we illustrate “Future Projections” – from our Monte Carlo simulations, what is your portfolio’s median expected value at retirement, and what is the worst case scenario (10% Worst Outcome”).
We conclude the first page of the Investment Checkup with actionable recommendations on how to rebalance your portfolio.
The second tab (Costs) of the Investment Checkup identifies the fees that you pay in your accounts. The tool translates for you how much those fees can end up costing you by retirement. It also demonstrates whether you’re on track by running a comparison against what a potential low-cost portfolio would look like.
Free Financial Advice for Every Household
Our goals with the new Investment Checkup are threefold:
- Transparency & Education. First, we offer complete transparency on the fundamentals of what makes sound investment strategy. We show our users the core investment concepts that underpin the analysis that we do.
- Actionable Personalized Analysis. Second, we illustrate how these concepts relate to our users’ actual portfolios. We keep it as simple as possible to improve understanding and leave with actionable advice.
- Free (and Conflict-Free) Advice. Not only is the advice free, but you’re free to do what you want with it. We serve you, our customer, and no one else. We don’t put advertising on our site, take fees or commissions from anyone selling financial products, or rent your name or data to other companies. Your private data is safe.
The new Investment Checkup is the first investment tool that gives you a completely personal and data-driven analysis of your long-term financial health. This comprehensive review, never accessible to individual investors until now, is available to you at no cost at Personal Capital.
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