Journal of Personal Finance Volume 13 Issue 2

Volume 13 Issue 2 2014 www.journalofpersonalfinance.com

Journal of Personal Finance Techniques, Strategies and Research for Consumers, Educators and Professional Financial Consultants

IARFC INTERNATIONAL ASSOCIATION OF REGISTERED FINANCIAL CONSULTANTS

2014 National Financial Plan Competition

and the Winner Is... Bryant University

Bryan t L-R Ja Universitymie P epin, presents “f Laure i n Fay ctional” B r ne an d Kyle ewster fam ily pre Creed on senta ti

on:

First Place — Bryant Universitty Smithfield RI, team members Kyle Creedon, on, Lauren Fayne, Jamie Pepin and their instructor Mara Derderian

The results are in and the winner is Bryant University! So ended the 2014 Financial Plan Competition 2 day event in Las Vegas.

On hand were the student finalists, their advisors, family, IARFC members as judges and professional presenters.

The previous day’s activities of the Impact Branding Workshop and Reception gave the students an opportunity to network and get to know the financial professionals that were part of the event. “Coach Pete” D’Arruda, Les Anderson and Ed Morrow highlighted why branding is such an important part of the Financial Advisor’s public persona and how to build it.

The Results First place – Bryant University Smithfield RI, team members Kyle Creedon, Lauren Fayne, Jamie Pepin and their instructor Mara Derderian.

Second Place – Shepherd University Shepherdstown WV, team members Bonnie Baily, Akhtar Khan, Avery Mendzela and their professor Nicolas Pologeorgis.

Third Place – Bowling Green University Bowling Green OH, team members Dana Kaufman, Elizabeth Kevorkian, Becca Smoody and their professor Matthew Garrow.

Contact: 800.532.9060

info@iarfc.org

www.IARFC.org

Volume 13, Issue 2

3

Journal of Personal Finance

Volume 13, Issue 2 2014

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Journal of Personal Finance

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CONTENTS Editor’s Notes ........................................................................................................................................................................................8

Portfolio Size Matters ........................................................................................................................................................................9 Gordon Irlam, Independent Software Developer & $

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........................................17 Janet L. Koposko, M.S., Doctoral Candidate, Oklahoma State University Douglas A. Hershey, Ph.D., Professor of Psychology, Oklahoma State University

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' $ " ) ! " ' ' .........................................................................51 Ken Steiner, Fellow of the Society of Actuaries, Retired

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, , % ........................................................................................................................62 Terrance K. Martin Jr., Ph.D., Assistant Professor, University of Texas-Pan American Michael Finke, Ph.D., Professor and Director of Retirement Planning and Living, Texas Tech University Philip Gibson, Ph.D., Assistant Professor, Winthrop University : D M

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â&#x20AC;&#x201D;Wade Pfau â&#x20AC;&#x201D;Joe Tomlinson

Volume 13, Issue 2

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Portfolio Size Matters Gordon Irlam, Independent Software Developer, Los Altos, California

In contrast to target date funds that vary asset allocation by age alone, it is important to take into account both the clientâ&#x20AC;&#x2122;s age and the clientâ&#x20AC;&#x2122;s portfolio size relative to spending goals when determining an optimal asset allocation. Stochastic Dynamic Programming (SDP) is a mathematical optimization technique that can be used to determine optimal dynamic adjustments to asset allocation in response to evolving portfolio wealth and time horizons. Using SDP, portfolio size appears at least as important to asset allocation decisions as age. For a 25 year old, asset allocation using SDP requires approximately 20-34% less resources than traditional target date asset allocation approaches. Financial planners can provide much value to their clients by incorporating portfolio size into a dynamic asset allocation strategy.

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Table II. Sensitivity of the optimal asset allocation map to various changes in scenario.

& & $ _ U= + &

8 $ + ;? # %

% % & & # 9 "

+ '$ B? # %" % +

&

&

+

% # % & ' " %#

^

% %#

$ %

=' # & %#

#

/ %' G ! # & $" $ & ' %#

'$

(

:- ( !

'

$ " $ '

& $# =

# ! % # # %

# & " strategy

age 25

age 65

age in bonds

34%

15%

age minus 10 in bonds

26%

11%

simpliďŹ ed Vanguard Target Retirement glide path

20%

12%

simpliďŹ ed Fidelity Freedom glide path

23%

12%

Table III. Reduction in asset requirements for SDP compared to alternative asset allocation strategies.

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