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Goal tracker

The goal tracker helps you manage your financial goals. It is built on our simulation engine that creates a unique projection based on your monthly contribution amount, goal target date and the cost or outflow associated with the goal.

We can't predict the future, but we can project it. The future is unpredictable. Our simulation engine runs many possible future scenarios to create a projection of your portfolio based on your contributions and risk profile. You can set and adjust goals at any time and our simulation engine will automatically create a new projection for you.

Why run simulations?

Markets are volatile and future portfolio value can vary significantly, which is why it is important to consider several different return paths that your portfolio can take. Some paths will result in performance that exceeds expectations, while other paths may result in performance that disappoints. Goal Tracker uses a commonly used statistical simulation technique called Monte Carlo, to simulate a range of paths for portfolio performance, based on long-term return estimates and annual volatility around those estimates.

Setting your financial goals

You can set a goal for any purpose by choosing a name, an amount, and how far it is in the future. The engine applies inflation to determine the amount on the target date. There are also more specialized goals which have calculations specific to college, a mortgage or retirement. This amount is compared with the median value of your account on that date to decide whether you are on target. The tool will tell you the likelihood of meeting your goals based on the current projection. A new projection is created each time you come back to check in on the goal tracker.

Using risk scores to track your goals

Interactive Advisors assigns every client and portfolio a risk score on a scale of one to five. Your personal risk score helps determine which investments are suitable to help you achieve your financial goals.

Cautious

Growth

Growth plus

Aggressive

Speculative

Personal risk score

We employ a questionnaire to determine your risk score based on your objectives, risk tolerance and financial capacity.

Portfolio risk score

We use quantitative as well as qualitative techniques to assign a risk score to each portfolio.

In order to estimate the likelihood of achieving your future goals, the goal tracker tool makes certain assumptions regarding the expected risk and expected return of your investments¹. While actual realized performance of portfolios within the same risk score bucket may have a wide range of outcomes, the expected risk and return of portfolios within the same risk score bucket is assumed to be the same.

IA restricts clients from investing in portfolios that are deemed too risky for a client's risk profile.

Learn more about risk scores

How goal tracker works

Risk and return estimate across portfolio types

To compute expected risk and return estimates for each of the risk score buckets, we needed to look beyond the portfolios that are offered at IA. This is because most of the portfolios at IA have less than 5 years of performance history and their historical returns are thus not necessarily indicative of different market cycles¹.

Instead we look at a wide array of liquid ETFs that have longer histories to come up with initial estimates of expected risk and returns. Indicative ETFs considered include:

We look at broad fixed income ETFs, e.g. LQD (iShares Investment Grade Corporate Bond ETF).

We look at broad diversified index ETFs, e.g. IWB (iShares Russell 1000 ETF).

We look at broad diversified small-cap index ETFs, e.g. IWM (IShares Russell 2000 ETF).

We look at sector-concentrated ETFs, e.g. ICF (Shares Cohen & Steers REIT ETF).

We look at geography (e.g. Emerging Markets, EM) -concentrated ETFs, e.g. ILF (iShares Latin America 40 ETF).

Risk score	Average of 15 year category ETF return	Average of 15 year category ETF volatility (risk)
	5.2%	6.4%
	8.3%	14.7%
	8.6%	18.3%
	9.3%	20.4%
	9.4%	23.4%

Expected Volatility

We do an additional calculation for expected volatility, which is consistent with our proprietary risk scoring methodology. Using the upper end of the volatility range, and using a 15-year estimate of SPDR S&P 500 ETF volatility of 13.7%. we arrive at a more conservative risk estimate.

Risk score	Volatility range as % of S&P 500 volatility
	0 - 60%
	60 - 110%
	110-150%
	150-200%
	200% +

Estimated risk

We use the numbers in green as return estimates, and the numbers in red as risk estimates for the different risk score portfolios at IA.

Average of 15 year category ETF return	Average of 15 year category ETF volatility/risk	Conservative estimate of volatility/risk
5.2%	6.4%	8.2%
8.3%	14.7%	15.1%
8.6%	18.3%	20.5%
9.3%	20.4%	27.4%
9.4%	23.4%	34.2%

Risk/Return estimates

For our Asset Allocation (AA) reference portfolios, we use the following risk return estimates.

	Return	Risk
Reference: Conservative AA	5.5%	6.7%
Reference: Moderate AA	6.6%	9.3%
Reference: Aggressive AA	7.8%	13.4%

How we arrived at these figures

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To arrive at these hypothetical return and volatility estimates, we started off with the 10-year return and volatility estimates of the iShares Core Aggressive, Core Growth and Core Conservative ETFs² at the time of writing this paper. (We selected these three ETFs because they are the benchmarks we use in managing and monitoring the performance of our reference Aggressive, Moderate and Conservative Asset Allocation portfolios). However, we felt that the realized Sharpe ratio for these benchmark ETFs over this 10-year period may not be sustainable going forward, since the last decade has been one of lower volatility and higher returns historically. Therefore, to account for this, we decided to adjust expected return estimates down, and expected volatility estimates up for our Goal Tracker assumptions. The adjusted lower return estimates (discussed in the previous paragraph) were sanity-checked against the return estimates for the 80/20, 50/50 and 30/70 stock/bond portfolios, calculated by Vanguard using historical data from 1926 to 2017 and with return, risk and sharpe ratio estimates of various Asset Allocation portfolios calculated by Norges Bank using data from 1961 to 2016³. For the Asset Allocation portfolios, we have assumed management fees of 0.20% in generating the hypothetical return estimates set forth above⁴. For portfolios belonging to each risk score bucket - the returns are exclusive of the management fee and trading costs for the representative ETFs. In order to be conservative we assume the average management fee for portfolios (other than the reference Asset Allocation portfolios) belonging to each risk bucket as laid out below.

Management fees

These are the average management fees used for portfolios other than Asset Allocation portfolios by risk score.

Risk score	Average management fee
	0.42%
	0.28%
	0.29%
	0.62%
	-

Account wide risk-return estimate

Since your investments may be distributed across multiple portfolios, we calculate risk return estimates for your overall account investments in real time.

The return estimate is simple to calculate. It is just a weighted average of the underlying return estimates across the underlying portfolio types.

The risk estimate is also just a weighted average of the underlying risk estimates across the underlying constituents, provided you assume no diversification benefits across the portfolio types. Since this represents a conservative approach in risk estimation, this is the approach we take.

	Return	Risk
Reference: Conservative AA	5.5%	6.7%
Reference: Moderate AA	6.6%	9.3%
Reference: Aggressive AA	7.8%	13.4%
Cash	0%	0%
	4.5%	8.2%
	7.8%	15.1%
	8.2%	20.5%
	8.5%	27.4%
	8%	34.2%

Illustrative example

Portfolio	Risk score	Amount invested	Proportion (%)
Cash	N/A	$5,000	10%
Reference: Aggressive AA	N/A	$20,000	40%
Clean Energy Portfolio		$12,500	25%
Quality Portfolio		$7,500	15%
Long Term Value		$ 5,000	10%

Account wide calculation:

Combining the table above with table 3 below, we can calculate a weighted average.

Estimated return = [0.1x0 + 0.4x7.8 + 0.25x8.2 + 0.15x8.2 + 0.1x8.5] = 7.25%
Estimated risk = [0.1x0 + 0.4x13.4 + 0.25x20.5 + 0.15x20.5 + 0.1x27.4] = 16.32%

We also allow the client to explore additional ‘what-if’ scenarios. e.g,:
a) What if the available-to-invest cash were invested in your recommended portfolio:
Estimated return = [0.1x7.8 + 0.4x7.8 + 0.25x8.2 + 0.15x8.2 + 0.1x8.5] = 8.03%
Estimated risk = [0.1x13.4 + 0.4x13.4 + 0.25x20.5 + 0.15x20.5 + 0.1x27.4] = 17.66%

b) What if the entire amount were invested solely in your recommended portfolio:
Estimated return = 7.8%
Estimated risk = 13.4%

Caveats and disclosures

The long-term return estimates used by the Goal Tracker tool are estimates intended to provide a general guideline for the potential returns of a client’s investment with Interactive Advisors. The projections or other information generated by the long-term return estimates regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results or the realized returns of any of our portfolios, and are not guarantees of future results. Hypothetical projected portfolio returns assume reinvestment of interest and dividends and do not include taxes or inflation adjustments. Hypothetical projected portfolio values could differ significantly from the actual performance of any of our portfolios. As such your likelihood of achieving your goals portrayed by the tool may be overstated and unrealistic.

Goal tracker allows the user to set varied goals - e.g. vacation expense, medical expense, house down payment, college expense, retirement spending etc. Most of these goals require the user to just indicate a goal amount and a goal target date. For many of these goals, the goal tracker assumes a lump sum outflow on the target date. Exceptions are the college goal and retirement goal. The college expense goal assumes 4 annual payments, rather than a single payment. The retirement goal assumes monthly outflows for expenses, as well as monthly inflows for social security checks⁵. For IRA accounts we assume no Social Security inflows and compute an approximate mandated Required Minimum Distribution⁶ based on no penalty retirement age and a linear schedule⁷. All future inflows and outflows are adjusted for inflation. We assume an inflation rate of 3% which is consistent with the average observed inflation rate over the last 20, 40, 60, 80 and 100 years during which period inflation has fluctuated between 2 and 4%⁸. All outflows are after-tax and assume a long-term capital gains tax of 20%. While capital gains can be taxed at 0%, 15% or 20% depending on income, we take a conservative approach and assume that the client is paying the highest rate. IRA distributions in retirement are assumed to be taxed at 25% based on a conservative estimate applicable to most clients⁹.

The tool’s estimates and projections are hypothetical in nature, do not reflect actual investment results for your account, the account of any other Interactive Advisors client, or the realized returns of any of the portfolios, and are not guarantees of future results. There is no guarantee that you will reach your goal(s), and assumptions not used in this tool and other market developments can affect the probability of reaching your goal(s). Interactive Advisors does not make any representation that any client will or is likely to achieve results similar to these by investing in an Asset Allocation or another portfolio on its platform. The tool’s estimates and projections can vary with each use and over time. These estimates and projections are provided for informational, educational and illustrative purposes and are not intended to constitute and should not be relied on as a full financial plan, comprehensive financial planning, legal or tax advice. Interactive Advisors does not in any way represent that the estimates generated using this tool are based on or meant to replace a comprehensive evaluation of a client’s entire personal portfolio. None of the tool’s projections should be construed as an offer, recommendation or solicitation to buy or sell any security. Past performance is no guarantee of future results, and all investments, including those in any portfolios, involve the risk of loss, including loss of principal (the money you invest) and a reduction in earnings. Returns shows are net of fees and expenses. Please review the assumptions section for the fee level used to model the returns. Returns reflect the reinvestment of dividends.

¹ https://www.sdattonline.org/single-post/2018/10/12/The-Risk-and-Return-Relationship open_in_new
² Shares Core Aggressive Allocation ETF open_in_new , iShares Core Growth Allocation ETF open_in_new , iShares Core Conservative Allocation ETF open_in_new
³See estimates provided by Vanguard open_in_new and Norges Bank picture_as_pdf
⁴See cost calculator provided by Interactive Advisors. The 0.20% commissions and management fee level is the highest percentage level that could be charged for an investment in one of our Asset Allocation portfolios and corresponds to the lowest investment amount in one of these portfolios (i.e. $100).
⁵ Social security inflows are calculated based on tables open_in_new and formula picture_as_pdf .
⁶ See IRA Required Minimum Distributions open_in_new
⁷ See See IRA RMD worksheet picture_as_pdf
⁸ See inflation calculator open_in_new
⁹ See Tax Brackets open_in_new for IRA distributions