What are the mechanics of Upside Investing?

It isn't clear to me exactly how the Upside Investing logic works. I have a few questions below.

Question #1 - What happens to net contributions after we start converting stocks to safe assets but before we expect to have converted all stocks to safe assets?
Let's say we will start to convert stocks to safe assets in 2020 and finish in year 2030. In year 2021 we expect a big inflow of cash which is captured in our Earnings. Where will that inflow go? Will it all be directed to safe assets? Will any be directed to risky assets?

Question #2 - How exactly is the translation from risky to safe assets handled?
Let's say we want to begin our transfer in year 2020 and finish in year 2030. At the end of year 2019 50% of our portfolio is not in 'risky' assets. So we begin 2020 with 50% risky/50% safe. How exactly will the upside investment calculator determine the path from 50% to 100% Does it just divide over the time and apply evenly? In other words we have 10 years to get the rest of our portfolio covered so does it convert 10% of our risky assets a year?


dan royer's picture

Q1: I'm not sure on the earnings. My thinking is that the earnings are not relevant because we are still just seeing the probability analysis on the existing stock positions. This is the "upside" possibility that they return at the historical rate of the S&P so the earnings are already included in each year's upside.

Q2: Yes, it divides over time--so 1/10th of your risky assets the first year, then the next year, 1/9th, etc. in your example.

Thanks. Does that mean that the upside investing doesn't take into account any new contributions to the retirement accounts? I note this statement from the manual:

When you are NOT in Upside investing mode,
you are not asked about contributing future investments to regular assets (but you are asked about
contributions to retirement assets).

dan royer's picture

Well, it means that those contributions to any "risky assets" are assumed to be lost. If some of those contributions are to safe assets (see the percentage you have set) then those assets count toward your "floor value" living standard and those that go to risky assets are assumed to be completely lost. But then in the Upside probability report, you can see what upside there might be beyond the floor value.

I never got an email telling me that there were responses to this thread. I did check my junk mail just in case it got mis-routed, but nothing.

In regards to Q1, can we get a definitive answer as to what exactly the software is doing with new assets once the safe asset transfer has begun? How is new income or one off income events (like selling a house) accounted for?

dan royer's picture

Regarding Q1: all assets eventually get converted to safe assets--and the start time on that and end time on that are indicated in your Upside setting for both Regular Assets and Retirement Assets. So the "inflow" as you say--the upside--comes back into your accounts as safe assets invested at your safe asset rate.

Income from a home sale is accounted for in the Housing Report and if there is net income, it goes into Regular Assets (see regular asset report but also housing report).

The Question Forum doesn't notify by email (like support tickets do). But this is the correct place to ask the kinds of questions you are asking (in case others have the same questions). There is an RSS feed at the bottom--in case you use an RSS feed reader. But most users I suspect just sign in and see the "New Content" listed at top right. I'd click through and view all new content until that block shows it is all read (I believe it just tracks the last 25 posts maybe).

Most comment systems support the ability to mark a flag saying "notify me via email when there is a response to this thread". Consider this a request for such a feature for E$planner. :)

So I understand what you are saying. So then how would this scenario play out? I start investing in say 2015 in the stock market just as I begin working. Of the next 20 years I expect my salary to grow and with it my stock market contributions. I'm actually trying to keep a constant, say, 70/30, stock/bond split over that period of time (e.g. from 2015 to 2035). In 2035 I want to start the safe asset transfer and be in 100% safe assets by say 2055 (I'm just making up dates to make this concrete).

Near as I can tell there is no way to model this using upside investing? It seems like you can only specify a static yearly contribution to stocks before the safe upside start period (in this case 2035) begins. So it doesn't seem like there is anyway to model the 70/30 contributions, tied to rising income, from 2015 to 2035.

Or is there?

dan royer's picture

That's right. You can't make risky assets a 70/30 split. And furthermore, the "risky" assets are all S&P 500 type stocks. The "safe assets" percent return are set in your Assumptions area. If your inflation is 3% and you set safe assets to 2%, then you lose 1% to inflation.

Upside is really a peculiar kind of monte carlo analysis--but as you discovered, it only allows for experimentation with two assets class: "safe" and "risky."

Your contributions over the 20 years would go into risky assets at the percentage that you specify in the setup.

If you just use Economics Mode, you could use what I call bracketing. You run your regular assets (savings, checking, etc.) down at say 2% nominal (at best) and then your retirement assets at 4% then try again at 5%, then again at 6% and again at 7% (if you feel lucky). You can also experiment with say 6% for the next ten years and then 5% for all the years after that (see the Assumptions settings for that set up).

It's hard for me to wrap my mind around upside investing mode because it just doesn't seem to make sense unless you are no longer contributing new assets. E.g. only once you retire.

Since I haven't retired yet my current plan is to use monte carlo mode and then use portfolios to capture the different asset ratios. E.g. build my own equivalent of upside investing by having a portfolio with say 50/50 and then 60/40 and 80/20 and finally 100/0. Then assign each portfolio to the years in which I want those ratios. I was then thinking of using the spending settings to try and see what different outcomes create.

dan royer's picture

The key to upside investing is that it explores this question: Say I am 40 years old. Say I contribute 50% of all my retirement contributions to the S&P for the next 25 years. Furthermore, let's assume that I lose ALL of that money that went into the risky assets. Let's further assume that the other 50% went into extremely safe, low return assets. What would my living standard be from age 40 through 100? Now then, let's further ask, what is the probability that my living standard might be higher than that "floor value" in any given year going forward from age 40 on. With Upside mode, you only get to explore this question using two asset classes--one very safe that you set the return on, the the other being the S&P that we have the historical return on.

Some people find this to be an interesting question to explore. I do not because I would never allocate my money that way in practice. It's an interesting thing to try, but not practical for me personally. But I also don't find the Monte Carlo very practical for me either because I don't trust much the backward looking historical basis of the variance, beta, and return that this probability analysis relies on. It's not that it's necessarily wrong, but it seems to me just one dimension, one picture. I think a bit more abstractly I guess and prefer to allocate assets toward a target like 5% or 6% and readjust each year based on what actually happens. I can bracket: what if I always got 3% (merely kept pace with inflation) every year through age 100? (how do I like that living standard?) What if I earned 4% nominal every year through age 100? (how do I like that living standard?) Call me too simple! :)

We use cookies to deliver the best user experience and improve our site.