Market Crash Insight *AdviserGo*

The Market Crash insight is a disruptive simulation that allows a period of market flux injected into a plan at any point in the timeline with a view of its affect in the Let’s See charts. The duration, and the magnitude of the model market deviation is defined by the software’s default preferences.

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The Market Crash insight allows users to select the age (a future age of the primary client) at which the period of market flux is to begin. The “Planned First Shortfall” identifies when the first shortfall, if any, is projected to appear in the plan based on the software’s original account growth projections. The “Simulated First Shortfall” shows when the first shortfall, if any, is projected to appear in the plan when the simulated period of market flux is added to the timeline at the age specified.  

Note - The settings used by the simulation as to the % of market crash are not currently displayed in AdviserGo, but are present in the software’s back end preferences. You can see what assumptions are used by following the instructions below.

As with the other insights, you can view the adjusted return rates while using Market Crash simulation either by clicking the chart details button and using the slider at the top of the screen to select the year of the market crash, or by simply clicking the bar/year of the Let's See chart in which the market crash is scheduled to occur.

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The annual chart details legend will display. Click the Investments or Pensions tabs. These tabs will show the adjusted growth rates for savings and investments (the Investments tab) and for retirement savings (the Pensions tab) and the adjusted end of year balance of each account following the market loss.

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Fixed Growth – what does this refer to?

Thinking about a 'market crash' in terms of finite, 'fixed growth' percentage values requires that one disregards, or sets aside, questions about the specific, underlying combination of investment holdings within one's investment, and/or pension accounts. Consequently, a 'fixed growth' market crash is one that will be applied equally to an account invested entirely in, e.g., fixed interest holdings, as to an account invested entirely in emerging markets equities. The use of 'fixed growth' rates, therefore, requires one to set aside (for the moment) the reality that investment returns are, inherently, probabilistic in nature (i.e. risk-based).

Allocation Percentile – what does this refer to?

Investment returns are 'probabilistic' in nature (i.e. unpredictable, except in terms of statistical probability), but some outcomes, of course, are more probable than others. Consequently, for any given asset class (or combination of asset classes), there is a 'probability distribution' (based on past performance), which shows the likelihood of achieving any particular return (in any single year). The distribution also sets bounds on the range of (assumed) possible returns, relative to the assumed long-term mean. Typically, it is assumed that investment returns are 'normally distribute' and are, therefore, assumed to conform to a symmetrical 'bell curve' type distribution. The allocation percentile, therefore, refers to a position 'under the curve', along the continuum of (assumed) possible outcomes, between the 0th percentile (worst possible return), approximately 3 standard deviations below the long-term mean return, and the 100th percentile (best possible return), approximately 3 standard deviations above the long-term mean return. The assumed long-term mean return sits (by definition), of course, on the 50th percentile, straight down the middle of the bell curve.

For users who choose to derive investment returns (for investment/pension accounts) based on an underlying asset allocation, the practical upshot is that one will need to specify a 'market crash' in terms not of the investment outcome itself, but in probabilistic (i.e. percentile-based) terms.