User Guide

This screen contains a Risk Warning and a description of the Inputs and Outputs section of iProtect.

RISK WARNING

The Author declares that all reasonable care has been taken to ensure that data and calculation systems which have been implemented in the creation of iProtect are correct in all material respects, and that there are no serious omissions. However, the Author is not responsible for any loss or damage resulting from trading in securities to you or to any third party in connection with the use of iProtect.

You should be aware of the risks associated with securities' investment. Please remember that past performance is not necessarily a guide to the future. Market and currency movements may cause the value of investments, and the income from them, to fall as well as rise and you may get back less than you invested. Smaller and emerging markets can be more volatile than larger and developed markets and can carry more risk. Independent financial advice should be taken before entering into any financial transaction. There can be no assurances that countries, markets or sectors will perform as expected. Investing in stocks and bonds directly or indirectly may not be suitable for everyone. In particular, you have to be aware of interest rate risk, credit risk and reinvestment risk for bonds. You have to be aware of market risk as well as specific risk for equities. If you have any doubts as to the suitability of your investment, you should seek professional advice.

Investment may have tax consequences and it is important to bear in mind that the Author does not provide tax advice. You should consult your own tax adviser if necessary.

iProtect allows you to enter scenarios, risk tolerance and risk free rate. You then decide which securities you invest in. The Author is not responsible for any loss resulting from any decision made by the user. You have to accept all risks related to the investment.

INPUTS

Horizon (in years)

Enter the number of years you want to invest for. If you enter a very long investment period (e.g. 20 or more years), consider editing "Risk Scenario" cell and your "Risk Tolerance" for the whole period. See below.

Amount

Enter the amount you wish to invest in your local currency.

Risk-Free Rate (p.a.)

Enter the yearly yield of a bond which has the same maturity equal to your Horizon. Yields are publicly available through many sources, e.g. www.bloomberg.com. Avoid currency risk, e.g. if you invest US Dollars for 5 years, enter the yield of a 5-year US Treasury bond.

Risk Tolerance

Enter the degree to which you are willing to accept a risk in your portfolio for the whole Horizon. Examples: 0% means that you do not accept a negative return at the end of your investment period; -10% indicates your willingness to tolerate a loss of -10% as the worst case scenario.You can also enter positive numbers. These indicate your risk tolerance is very low.

The maximum number you can enter must be equal to the value which you see in the "Cumulative Rate" cell. This number tells you the cumulative yield on the Horizon obtainable from a Bond investment. The minimum number you can enter must be equal to the value displayed in the field "Risk Scenario".

Risk Scenario

iProtect gives you an idea of the worst case scenario for the equity market. “Value at Risk on 99% confidence level” is used for the calculation. Click the "Assumptions" button to see end edit market assumptions.

If you enter very low Volatility and/or very high expected Equity return and/or low Confidence level, you will obtain an unrealistic Risk Scenario and, additionally a too risky allocation! Use these scenarios carefully and for training purposes only.

However, you can ignore these scenarios and enter any number you want into the Risk Scenario cell. If you enter -50%, no Risk Tolerance (0%) and a 5 year Horizon, your portfolio will be protected at the end of a 5 year Horizon against a drop of your equity investment by 50%.

If you invest into high-risk instruments (such as options instead of equities) you should enter -100% to be protected against the total loss of the risky part of your portfolio. If you enter 0% and, for example, a 5 year Horizon you will NOT be protected at the end of the 5 year period against a negative performance of the equity market.

You are free to enter any scenario. However, it is not possible to enter positive numbers.

OUTPUTS

Asset Allocation

Bonds

The safest instrument for the fixed income part of the portfolio is a zero coupon bond issued by the government in the same currency used for the investment. The maturity of the bond should be equal to your Horizon. You can accept a small reinvestment risk by buying a coupon-bearing bond. You might use a cheap index-fund tracking a high-grade bond index, but you will have to accept some level of interest rate risk as well as credit risk. Try to find a fund which has the duration as close as possible to your Horizon.

You should seriously consider accepting an interest rate risk by buying much longer or shorter bonds then your Horizon. In the same way, you should seriously consider accepting a credit risk by buying lower rated bonds or a term deposit which might offer you a higher yield but expose you to a default risk.

Equities

It is highly desirable to use a diversified portfolio, e.g. index fund for S&P 500. However, you can invest in any equities you want (mutual fund or direct stock portfolio). You must consider the value you have entered in the "Risk Scenario" cell in order to avoid the risk of your diversification being too low.

Performance (p.a.) and Future Values

You can see the minimum, average and maximum performance of your portfolio on the Horizon.

A Minimum return will be achieved if the equity component drops by exactly the amount entered in the field "Risk Scenario".

An Average return will be achieved if equities deliver the return equal to the value entered in the "Assumptions" screen.

A Maximum return will be achieved only in the case of a positive impact of the volatility on the equity index.

The performance distribution is calculated from the following inputs: risk-free rate; expected return of equities; volatility of equities; and, allocation of your portfolio.

The calculation is, by default, based on a 99% Confidence level, 8% expect return for equities and 16% volatility. However, if you edit these numbers and/or edit the "Risk Scenario” cell, the results will be altered.