Are the Rate of Return (ROR) defaults at all sane or usable in Pralana Online? In my testing, the Simple Portfolio Modeling setting has these ROR defaults: cash: -2%, and 3% for everything else. Advanced Portfolio Modeling has ROR defaults of: Cash: 1%, Stocks: 3%, Bonds: 3% (and 3% for everything else as well). Also also for advanced, the defaults are the same regardless if you chose real or nominal ROR.
I don't pretend to be an economist, but these defaults seem "off" to me. eg, why are stocks & bonds configured with the same ROR?
Yes, I am aware that you can change them, and I am aware that there is a whole section on this forum where people are sharing what they are using for RORs. That's not what I'm asking, which simply is: Are the defaults reasonable, and could you use them to generate "reasonable" models without having to change them? And if not, why not? Shouldn't the defaults at least be "reasonable"?
@larryc The defaults are not intended to be anything other than placeholders. We expect users of Advanced Portfolio modeling to define their own asset classes and enter their own RORs.
That said, if you will suggest reasonable values, I would be happy to use them. The default for Advanced Portfolio Modeling is that entered RORs are 'real', so the default RORs would need to be net of inflation. Most people use 2.5% or 3% for the general inflation assumption.
@cstone Thanks for the reply. To some extent, this issue no longer affects me as I've already done the research to come up with the RORs in my model. So it's really a concern that would affect mostly new users, or perhaps also experienced users who want to compare the RORs they are using with the software's "recommended" RORs.
Regarding "The defaults are not intended to be anything other than placeholders", that's fair (and thank you for clarifying), but I don't think the software makes this clear. It should either explicitly say "These are placeholders that you must change", or perhaps simply leave these values blank. Plus it should be made crystal clear in the manual as well.
The rest of this post is really a suggested enhancement (and perhaps should be in the "Wish List" section of the forum):
Regarding the defaults ("placeholders") provided for Advanced Portfolio Modeling, it seems like it would be pretty straightforward for the software to be coded with nominal and/or real averages for historical stock and bond returns and then simply provide them in the program as the starting defaults.
Regarding Simple Portfolio Modeling, the more I think about it, the current defaults ("placeholders") are even more problematic as they use a 3% return across the board. And that's more misleading than the Advanced case default because in the Simple model, the ROR is supposed to represent the blended return of your portfolio, and that would vary extensively depending on your asset allocation. So someone using Simple portfolio modeling would be required to become an economist for a day researching the projected returns of their particular AA (eg 80/20 vs 60/40 vs 20/80) in order to provide this value. Doesn't seem so simple! 🙂
Thus my suggested feature improvement: For the Simple model, let the user input their AA and use that to provide a default ROR based on historical averages for that AA.
@larryc This is good feedback, thank you. Based on your suggestions I did some research on historical real rate of returns for cash/stocks/bonds and have made the following changes which will be in the next release, probably later today:
Default 'real' RORs:
- Simple Portfolio Modeling accounts: Cash = 0%, Taxable Investment = 5%, all other accounts = 4%
- Advanced Portfolio Modeling default asset classes: Cash = 0%, Stocks = 6%, Bonds = 2.5%, HSA Assets = 4%, 529 Plan Assets = 4%.
Re-wrote the user manual language to include language like below:
Simple Portfolio Modeling accounts:
While Pralana provides some default RORs, you should review and change these defaults to the rates of return you expect to achieve based on the assets you hold in each type of account.
The rates of return you enter should be the ‘real’ annual rate of return (the return over and above your general inflation rate). Pralana will calculate the ‘nominal’ inflation rate used to calculate account growth as: inflation rate + real ROR + (inflation rate * real ROR).
Advanced Portfolio Modeling:
For new plans/scenarios, Pralana provides default initial account balances as well as asset classes (e.g. Stock and Bonds), real rates of return and asset allocations for each account. For the Taxable Investment account, Pralana provides defaults for the taxation of annual growth. You should review and change Pralana’s defaults to reflect the asset classes you intend to hold in each account, their rates of return, your intended asset allocations, etc.
regarding your suggestion: "For the Simple model, let the user input their AA and use that to provide a default ROR based on historical averages for that AA."
In Simple Portfolio modeling, there is no user-defined asset allocation and the ROR is set at the account level. Thus, the name 'simple'.
Perhaps you meant Advanced Portfolio Modeling Mode 1: New scenarios will use the default asset classes "Stocks" and "Bonds" and "Cash" and the new/updated default RORs (shown above) based on the historical averages until if/when the user changes the RORs. Of course, the user may also create custom asset classes (e.g. 'Small-cap stocks based in California') for which they will need to enter an ROR.
@cstone Thanks so much for the quick response and acting on my feedback! It is appreciated!
Following up on "regarding your suggestion: "For the Simple model, let the user input their AA and use that to provide a default ROR based on historical averages for that AA."", I guess I wasn't clear. Let me try to restate this feature request:
For Simple Modeling, I do understand that you can only supply a single ROR per account type (cash, taxable, tax deferred, etc). The point I was trying to make (poorly) is that it is actually not so simple to come up with each of these RORs. It is likely that each account type is made up of multiple asset classes (eg, stocks & fixed income) with a specific asset allocation. So even if the user had the same AA across all account types (other than cash), they would be required to 1) research (on their own, outside of pralana) historical averages for each of those asset classes (eg, stocks = 6%, bonds = 2.5%, etc) and then 2) do the math to come up with the blended ROR for their own particular AA. That was why I made the tongue-in-cheek comment "doesn't seem so simple": given that we are talking about the simple scenario, it's likely the user is either a) less sophisticated or b) simply looking for something a little less complex to use.
That led to my suggestion (feature request) that it would be useful for this scenario to enable the user to input their AA, and then let the software come up with a reasonable, blended ROR based on historical averages (Eg, what you wrote above: stocks = 6%, bonds = 2.5%)
