About the Historic Insight in AdviserGo
The Historic insight is designed for mapping market volatility onto your client's financial plan. This simulation displays the performance of the FTSE All-Share index between 1900 and 2019 and allows you to select any time-span between these years. Each year represents a data point relative to the long-term mean of the FTSE All-Share index, on the assumption that investment returns conform to a 'bell curve' shaped probability distribution. Each data point has a value of between 0 and 100 (i.e. a percentile value) depending on its relative proximity to the mean (which lies at the 50th percentile). The corresponding percentile values, for each of the selected data points, are then mapped onto your plan. The precise outcomes (investment returns) that you see, year-on-year, will then be a function of your choice of asset allocations (i.e. portfolios) within the plan, and the specific asset class assumptions ('market assumptions') that underpin them.
How to run the Historic insight
The Historic simulation enables one to select one, or more, data points based on the FTSE All-Share index's past performance. Each data point is translated into a 'percentile' value, between 0 and 100. These percentile values, when applied to the specific asset allocations and portfolios being utilised within the plan, will produce the precise result(s) that you see within the plan, year-on-year.
1. To use the Historic insight, open your plan in AdviserGo and select Insights.
2. Scroll down and select the Historic insight.
3. Use the slider handles to select a period of past market performance. for the Historic insight to apply to the future returns in your plan.
Tip – Move your cursor over the years in the historical timeline to see how the FTSE All-Share index performed. This will give you some idea of the cycle the Historic insight will be modelling.
If the period you select is shorter than the time-span in your plan, as will likely be the case, then the market cycle will repeat. For example, if your financial plan is sixty years long and you select a ten-year period of past market performance, the insight will repeat the market cycle six times over the course of the plan.
Tip – Click the space between the two sliders to move the selected time span up or down the historic timeline.
4. With your historical period selected, click Get Started to run the insight.
The results of these variable returns will be shown in the charts above. A once very sound looking future Cash Flow chart – one that previously showed only blue inflows and no red shortfalls – might now display some red after the peaks and valleys of the market are applied to investments in your plan.
Switch to the Assets chart and you may find that the once smooth line of growth has now become jagged due to the now variable returns.
To view the year-to-year variable growth rates, click the Year View button.
Select either the Investments or the Pensions (Retirement) tab.
Use the slider to view the growth details for your accounts in future years in your plan. You should see variable returns when moving year to year in the plan.
How substantial a loss or gain your investments will experience in these future years will depend on the amount of risk (i.e. standard deviation) built-in to each portfolio or asset allocation.
Click the Year View button again to toggle off this view of the yearly details and return to the Historic insight screen.
Why aren't my investments showing variable returns when I run the Historic insight?
If the Historic insight is not causing the growth rate of your accounts to fluctuate yearly, first check which accounts are set to be grown using asset allocation.
To use this insight, at least some of the investment/pension accounts in your plan must be set to grow using an asset allocation (or model portfolios), rather than 'fixed growth' rates. This is because asset allocations allow for a range of potential returns, which fixed growth rates do not.
To reiterate, the Historic insight will only generate variable returns to accounts that are set to be grown using asset allocations (model portfolios). It is also the case that variable returns affects only the assumed rate of capital growth, while (dividend and interest) yield assumptions, on the other hand, remain unaffected.
For variable returns to be applied, model portfolios must be set to an asset allocation other than 100% Cash. This is because any returns to cash, as an asset class, will be treated 100% as interest yield, the rate of which, as stated previously, is unaffected.
To view the accounts that will be affected by the Historic insight, click the Account(s) Affected link top right above the historical timeline.
The accounts highlighted will be subject to variable returns when running the insight, provided they are grown using an asset allocation that is not 100% Cash.
If none of the accounts in the plan are set to be grown using asset allocation (all accounts are set to be grown using fixed growth rates), a prompt will appear asking you to select at least one account to be grown using asset allocation before running the Historic insight.
Options are also available on this dialogue to change your growth settings globally, in the Plan Settings, by switching on the option to “Grow all investment and retirement accounts using asset allocation”.
Switching on the additional option to “Grow all savings and cash accounts using a 100% cash allocation” would have no effect on the Historic insight since cash holdings are not adjusted by this simulation.
It is important to understand that by switching asset allocation on or off for accounts on this dialogue will alter how accounts are set to be grown in the plan itself. If you switch on asset allocation for an account via this dialogue, a model portfolio will be used to set the selected account’s growth rate; that is, at least until you either deselect the account on this dialogue or edit the account’s Growth settings on the Dashboard screen.
Note - If the default asset allocation is 100% Cash, as it is in the regular release of AdviserGo, you would still need to set an asset allocation / model portfolio for accounts individually for the simulation to apply variable returns.
Which types of asset class experience variable returns when running the Historic insight?
The Historic insight uses historical returns from the FTSE All-Share index. Does this mean variable returns are applied only to UK equities or only to equity holdings in general?
The Historic insight is intended only to be used as a method for introducing some variability into the software’s projected returns. This applies not only to equities, but to the entire asset allocation, excluding cash holdings. Variable returns are applied to the entire model portfolio, omitting cash.
Only capital growth is adjusted by the simulation, not dividend and interest yields.
The percentile values derived from historical FTSE All-Share index data may be an imperfect approximation of the percentile return for all categories of assets. The Historic simulation, however, is intended as a tool for introducing some level of market fluctuation to what is an otherwise deterministic projection provided by the software but fall short of full randomisation, for which one should use the Monte Carlo simulation.