Average Return Methodology
The Average Return return mode will use the actual historical average annual return and the underlying volatility of the investment and apply that as the expected return and six-month probability range respectively. Note that the Average Return mode negates the market assumptions (i.e. S&P/10-year US Treasury assumptions) completely; changes to those assumptions will not have any effect on investments set to use the Average Return return mode.
With regard to our analysis of investments with limited history: We believe that having a “lucky” inception date (not existing during a bear market) shouldn’t benefit the analysis of a new investment over others.
Our objective is to empower you to set realistic expectations with robust analysis. With that in mind, we use our existing extrapolation methodology to adjust the volatility of young securities, and an updated annual return ratio to adjust the stated probable annual return on young investments should they be identified as statistically anomalous. (Example: SPY vs. VOO.) As a result, a young security may or may not have the annual return ratio applied to it depending on its return history. More on this HERE.
This return mode is best suited for investments that have unique (typically active) objectives where traditional beta adjustments or capture ratios understate the investment's realized risk/return characteristics. On a portfolio level, this functionality would allow an advisor to disregard the Market Assumptions inputs altogether. For example, an advisor who wants to view a portfolio through a static historical lens can toggle each investment in their portfolio to use the Average Return mode. However, advisors wishing to use the dynamic functionality provided by entering market outlooks in the data model will continue to be best served by using Advanced Risk Modeling.
NOTE: Some investments will have more historical price history than others based on their inception date. So, an equity investment with an inception of March 2009 will likely have a higher calculated average annual return than, say, an investment with an inception in January 2014.
NOTE: We refer to those with an inception date more recent than January 1, 2008 as "young investments."