• software description • download software • tutorial • simulations
Software Description
FINANCIAL THEORY BEHIND THE SOFTWARE
Dream Calculator© relies on various fundamental financial concepts, such as the time value of money, risk vs. return, modern portfolio theory, etc. There are two parts to our financial planning process. First, the software matches your current and future assets and cash flows with your financial goals, indicating the goals that you can realistically meet. Second, it gives you specific investment advice in order for you to achieve your goals.
The investment advice is based on our asset allocation model, which is in turn affected by your risk tolerance and the timing of your financial goals. According to the model, for the goals due in 1 or 2 years we recommend you to invest 100% of the money into money market or bond funds. Likewise, for the goals due in 10 years and over, we recommend a 100% investment in various classes of stock funds. Finally, for the goals due between 3 and 9 years we recommend a mixed investment in both bond and stock funds with the stock content gradually increasing.
Based on the individual risk tolerance, we will suggest one of the three investment policies, each of which adequately protects the user from the financial risk, while offering attractive returns. The difference between the three policies is the tradeoff between a little more of potential return and a little more security.
The rates of return embedded into the calculations are based on the average historical inflation rate as well as the average rates of return on different classes of securities, such as T-bills, bonds, and various classes of stock. We looked at the past performances of various classes of securities and determined the geometric mean (rather than the arithmetic mean, which is used so often to make the averages look more attractive). Below is the summary of the historic average before-tax returns:
Inflation …………………..................... 3.00%
Money Market ………….….....………..... 3.57%
Bonds …................……....………....… 4.63%
Large Capitalization Stocks ……….... 10.72%
Middle Capitalization Stocks ……..... 11.32%
Small Capitalization Stocks ……...…. 11.91%
In order for the software users to have a better risk protection, we recommend them to invest into mutual funds rather than individual securities. The expected returns on all security classes are therefore adjusted to reflect the annual fees charged by the funds.
Copyright © 2008 Aromatica, Inc. All rights reserved.