Footnotes
1 Hypothetical example assumes a portfolio of 40% U.S. stocks and 60% bonds. Performance measured using daily total return data, assuming daily rebalancing. Investment grade bonds represented by the Bloomberg US Aggregate index; equities by the S&P 500; and cash by three-month T-bills. Data sourced from Bloomberg.
2 “On track” and "at risk" are designations in Morgan Stanley’s Goals Planning System (GPS) for investors with a financial plan based on the simulated probability they can achieve their goals. See appendix for further details
3 Stock market performance measured using daily peak-to-trough price data of the S&P 500 index. Data regarding financial plans and their associated portfolio value are based on week-end data from the Goals Planning System analytic tool. Using week-end data, the corresponding equity market peak-to-trough decline based on week-end data is 24%. See Appendix for full methodology, including how On-Track, At-Risk and Off-Track plans are identified.
Appendix
Empirical Analysis of Financial Plans
Our analysis of financial plan performance is comprised of all retirement plans made using the Goals Planning System (GPS) that were enrolled in progress to goals reporting during the time period in question (February 21, 2020, through March 27, 2020). These dates represent the peak and trough of the U.S. equity market during the 2020 COVID crash when measured using week-end data, as is necessitated by source data availability.
Accounts with large cash inflows or outflows during this time period were removed to control for the potential impact on plan status of unrelated cash flow activity, as were accounts that were closed or removed during this time period. Plans with less than $50,000 in assets were removed as outliers.
Our analysis comprised 119,813 plans that met these conditions, with portfolio values ranging from $50,000 through about $303 million measured on March 27, 2020. The average portfolio value across the plans measured was $1.2 million, and 90% of plans considered in our analysis had values of roughly $2.6 million or less on this date.
Life stage (saving for retirement, nearing/early retirement and mid/late retirement) was defined relative to the specified retirement age for each plan. Those with more than 10 years before the stated age of retirement were designated as saving for retirement; those with 10 or fewer years to retirement or in the first five years of retirement were put in the nearing/early retirement category; and those with over five years since beginning retirement were designated as mid/late retirement.
GPS Designations:
“On track” is a designation in the Goals Planning System (GPS) for investors with a financial plan whose probability of achieving their goals is greater than 70% for their “total goal” (essential and discretionary spending) and greater than 85% for essential expenses.
Investors considered “at risk” in GPS are those with a financial plan whose probabilities of success are 50%-70% for their total goal and 75%-85% for their essential goal.
“Off track” investors are those with probabilities of less than 50% for their total goal and less than 75% for their essential goal.
An investor’s probability of success, i.e., of achieving their goals, for each plan was calculated in GPS using Monte Carlo analysis and the Morgan Stanley Global Investment Committee’s capital market assumptions at the time.
See “Plan Not to Panic: Navigating Market Volatility with Financial Planning” for full methodology.
Chart: Analysis drawn from fully specified plans, which enumerate both total and essential-only goals. See “Plan Not to Panic: Navigating Market Volatility with Financial Planning” for full methodology.
Hypothetical Case Studies: Hypothetical retiree profiles and analysis created using the Goal Planning System (GPS). See “Plan Not to Panic: Navigating Market Volatility with Financial Planning” for full methodology.
Index Definitions
S&P 500 Index: The Standard & Poor's (S&P) 500 Index tracks the performance of 500 widely held, large-capitalization US stocks.
Risk Considerations
Hypothetical Performance
General:Hypothetical performance should not be considered a guarantee of future performance or a guarantee of achieving overall financial objectives. Asset allocation and diversification do not assure a profit or protect against loss in declining financial markets.
Hypothetical performance results have inherent limitations. The past performance shown here is simulated performance based on benchmark indices, not investment results from an actual portfolio or actual trading. There can be large differences between hypothetical and actual performance results achieved by a particular asset allocation. Actual performance results of accounts vary due to, for example, market factors (such as liquidity) and client-specific factors (such as investment vehicle selection, timing of contributions and withdrawals, restrictions and rebalancing schedules). Clients would not necessarily have obtained the performance results shown here if they had invested in accordance with any GIC asset allocation, idea or strategy for the periods indicated.
Despite the limitations of hypothetical performance, these hypothetical performance resultsmay allow clients and Financial Advisors to obtain a sense of the risk / return trade-off of different asset allocation constructs.
Indices used to calculate performance:The hypothetical performance results in this report are calculated using the returns of benchmark indices for the asset classes, and not the returns of securities, funds or other investment products.
Indices are unmanaged. They do not reflect any management, custody, transaction or other expenses, and generally assume reinvestment of dividends, accrued income and capital gains. Past performance of indices does not guarantee future results. Investors cannot invest directly in an index.
Performance of indices may be more or less volatile than any investment product. The risk of loss in value of a specific investment is not the same as the risk of loss in a broad market index. Therefore, the historical returns of an index will not be the same as the historical returns of a particular investment a client selects.
Fees reduce the performance of actual accounts: None of the fees or other expenses (e.g. commissions, mark-ups, mark-downs, advisory fees) associated with actual trading or accounts are reflected in the GIC asset allocation strategy or ideas. Fees and/or expenses would apply to clients who invest in investments in an account based on these asset allocations, and would reduce clients’ returns. The impact of fees and/or expenses can be material.
Investing in the market entails the risk of market volatility. The value of all types of securities may increase or decrease over varying time periods.
This analysis does not purport to recommend or implement an investment strategy. Financial forecasts, rates of return, risk, inflation, and other assumptions may be used as the basis for illustrations in this analysis. They should not be considered a guarantee of future performance or a guarantee of achieving overall financial objectives. No analysis has the ability to accurately predict the future, eliminate risk or guarantee investment results. As investment returns, inflation, taxes, and other economic conditions vary from the assumptions used in this analysis, your actual results will vary (perhaps significantly) from those presented in this analysis.
The assumed return rates in this analysis are not reflective of any specific investment and do not include any fees or expenses that may be incurred by investing in specific products. The actual returns of a specific investment may be more or less than the returns used in this analysis. The return assumptions are based on historic rates of return of securities indices, which serve as proxies for the asset classes. Moreover, different forecasts may choose different indices as a proxy for the same asset class, thus influencing the return of the asset class.
Monte Carlo Analysis Assumptions:As indicated above, the hypothetical analysis uses a Monte Carlo simulation to generate randomized, correlated returns that overall have similar characteristics to the Global Investment Committee’s 2020 strategic (seven-year capital markets assumptions. The Monte Carlo simulation involves sampling from those monthly returns for the constituent asset classes. From those monthly returns, we can compute hypothetical monthly returns for portfolios constructed with a lump-sum investing or dollar-cost averaging approach as of any month in the simulated returns data.
IMPORTANT:The projections or other information generated by this Monte Carlo simulation analysis regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results and are not guarantees of future results. Results mayvary with each use and over time.
Equity securities may fluctuate in response to news on companies, industries, market conditions and general economic environment.
Asset allocation and diversification do not assure a profit or protect against loss in declining financial markets.
Environmental, Social and Governance (“ESG”) investments in a portfolio may experience performance that is lower or higher than a portfolio not employing such practices. Portfolios with ESG restrictions and strategies as well as ESG investments may not be able to take advantage of the same opportunities or market trends as portfolios where ESG criteria is not applied. There are inconsistent ESG definitions and criteria within the industry, as well as multiple ESG ratings providers that provide ESG ratings of the same subject companies and/or securities that vary among the providers. Certain issuers of investments may have differing and inconsistent views concerning ESG criteria where the ESG claims made in offering documents or other literature may overstate ESG impact. ESG designations are as of the date of this material, and no assurance is provided that the underlying assets have maintained or will maintain and such designation or any stated ESG compliance. As a result, it is difficult to compare ESG investment products or to evaluate an ESG investment product in comparison to one that does not focus on ESG. Investors should also independently consider whether the ESG investment product meets their own ESG objectives or criteria.There is no assurance that an ESG investing strategy or techniques employed will be successful. Past performance is not a guarantee or a dependable measure of future results.
Rebalancingdoes not protect against a loss in declining financial markets. There may be a potential tax implication with a rebalancing strategy. Investors should consult with their tax advisor before implementing such a strategy.
The indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment.
The indices selected by Morgan Stanley Wealth Management to measure performance are representative of broad asset classes. Morgan Stanley Wealth Management retains the right to change representative indices at any time.
Disclosures
Morgan Stanley Wealth Management is the trade name of Morgan Stanley Smith Barney LLC, a registered broker-dealer in the United States. This material has been prepared for informational purposes only and is not an offer to buy or sell or a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. Past performance is not necessarily a guide to future performance.
Morgan Stanley Smith Barney LLC, its affiliates and Morgan Stanley Financial Advisors do not provide legal or tax advice. Each client should always consult his/her personal tax and/or legal advisor for information concerning his/her individual situation and to learn about any potential tax or other implications that may result from acting on a particular recommendation.
This material, or any portion thereof, may not be reprinted, sold or redistributed without the written consent of Morgan Stanley Smith Barney LLC.
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