Building Your Portfolio

Stochastic modeling, sometimes known as Monte Carlo simulation, is a statistical process that uses probability and random variables to predict a range of probable performances, such as traffic flows or investment portfolio returns. The term stochastic comes from the Greek word meaning skillful in aiming.

An investment asset is something of value that you can use to help meet your financial goals. For example, if you buy stock in a corporation, your stock is an asset. If the stock increases in value over time, you can either sell it for more than you paid for it, or you can hold it in your portfolio to increase your net worth. If the stock pays dividends, you can either spend the money or use it to make more investments, whether in the same stock or in something else.

Of course, assets don’t always behave the way you expect. Stocks may cut their dividends rather than raise them, especially in tough economic times. And some stocks lose rather than gain value, either in the short term or over the long haul. Besides stocks, there are many asset categories, called asset classes, which produce gains and losses in different ways and react differently to changes in the financial markets. To determine the allocation that’s right for you, you’ll want to consider where you are now financially, where you want to be in the future, and the money you’ll need to get there. It’s a four-step process:

• Inventory your current assets and accounts.
• Estimate the future contributions you expect to make to your accounts.
• Define your financial objectives and project what they will cost.
• Calculate the return that you must earn on your assets in order to meet your goals and objectives.

Contributions from the book Understanding Asset Allocation in this press release are used with permission from Light Bulb Press.