I cloned Scenario 1 to Scenario 3. I am using Advanced Portfolio Modeling. With a 3.5% general inflation rate, I am using a 4.0% real ROR in one scenario and 7.64% nominal ROR in the other (all other factors being the same). I also validated the toggle between real and nominal when changing scenarios and running the Account Statement. The total of the ending balances for each of the Account Statements are materially different and I can't determine why or which is correct. Difference is approx. $1.2M so I am definitely doing something wrong. Any help is appreciated.
@patton525 When using Advanced Portfolio modeling, the choice for "Asset Rates of Return: Real or Nominal" is a plan-wide setting that applies to all scenarios. See on that input section, top right: "Scope: all scenarios and asset allocation modes"
In your plan, I looked at Review > Compare Scenarios and selected scenario 1 and 3. The chart shows a DRAMATIC difference in S1 vs S3 final savings.
I then looked at More > Tools > Compare Scenario Inputs and compared S1 and S3.
There, the difference is obvious, as you will see. Your RORs are MUCH larger in S3 than in S1.
You can also see the net effect by looking at Review > Tab Projn's > Portfolio > Rates of Return and comparing S1 and S3 RORs side by side.
@cstone I identified the large difference initially and I think I understand the plan wide toggle button. That was the reason for my question.
Let's start over and eliminate Scenario 2 and 3 and deal with Scenario 1 only. For testing, please use a 4.0% real ROR in the Advanced Portfolio Modeling and select Real in the toggle button. That yields a certain CoS and ending values in the Account Statements. Now, let's change the 4% to 7.64% and toggle from Real to Nominal (using a 3.5% inflation rate). I assume this is allowed. I would expect very similar results. However, the difference is material as before.
I know the toggle impacts all scenarios, but I am simply dealing with one scenario and changing from real to nominal. Do I need to logout and start from scratch? Which of the two above test is the correct results? I just need to ensure integrity of my results.
@patton525 I see you currently have Stocks ROR at 7.64% nominal in your scenario. When you changed the Stocks RORs from real to nominal, did you also similarly change the RORs on your other asset classes: Bonds and Cash? I suspect not because Cash is currently -3% and Bond is .0.5% which seem unlikely nominal RORs.
If you didn't adjust them all when switching from real to nominal, the rates of return will be relatively lower using 'Nominal' for Cash and Bond leading to lower growth, balances and final savings/net worth.
To test this, I did an experiment to switch between real and nominal by applying the formula nominal ROR = Inflation Rate + Real ROR + (Inflation Rate * Real ROR) ....just as you did....but applied the adjustment to all asset classes.
I used one of my test plans which, for simplicity has only 2 asset classes: Cash and Stocks.
Version #1 uses "Real": 3.5% inflation rate, Stocks 3.000%, Cash -2.500%. Final savings = 7,769,760
For nominal, convert the RORs...
Version #2 uses "Nominal": 3.5% inflation rate, Stocks 6.605%, Cash -0.912%**. Final savings = 7,769,659**
The final savings differ only by $103 due to rounding the nominal Cash ROR to 5 decimal places instead of 6. Converting the -2.5% Cash ROR from real to nominal yields 0.9125%, but Pralana only supports 3 decimal places on RORs (percentages) so the 0.9125% is entered as 0.912% causing the Version #2 final balances to be lower by 0.0013255% (103/7,769,760)
