Using PATHFINDER

How to optimize a long-term plan:
entries, graphs, client communication.

(Scroll down.)

To enter a client plan choose ClientEntries on the menubar.

In the top of the ClientEntries window, enter basic client data as shown below.

At top right, an Explain button offers a menu of explanations of client entries.

In the first tab-page in the lower part of the ClientEntries window, make entries for the client’s future Goals for which the client will need funds, as illustrated below.

In the second tab-page, make entries for the Client’s planned Contributions -- present and future sources of funds to meet the Goals -- as illustrated below.

After making entries for Goals and Contributions, click the Cash flow button at the ClientEntries window’s upper right (shown in the top illustration). The Cash flow window will show a year-by-year schedule of Contribution inflows and Goal outflows, as illustrated below.

With this plan-entry system, you can prepare a complete long-term schedule of desired future Goal outflows and planned Contribution inflows with just a few entries, as the illustrations above show.

This plan-entry system also has other advantages. It is based on entry of pivotal numbers, which enables PATHFINDER to apply modeling for exploration of what-if changes in these factors. And in client communication and education, it helps you focus the client attention on a relatively few numbers that really count, instead of losing the client in snowstorms of inconsequential numbers.

The Cash flow table offers options for viewing effects of inflation. Its numbers can be shown in terms of today’s familiar costs, or in terms of physical dollars with declining future values based on inflation-rate entries.

Note that the PATHFINDER Cash flow table does not include numbers for future investment returns, nor for fees and taxes that will be determined by future returns. Nobody knows what future investment returns will be. It would be irresponsible to present specific numbers for these items and dangerous: great danger of misleading clients, and danger of liability for planners.

In the ClientEntries window’s third tab-page, shown below, enter tax rates and predicted inflation rates in the small tables at upper left.

Then, after selecting asset classes as shown in the second illustration below, in the large table make entries for each asset class for fees and NonQualified taxabilities as illustrated below.

To open the AssetClasses window shown below, click the Select asset classes button shown in the illustration above, or choose AssetClasses on the menubar. Select asset classes by clicking their checkboxes at right, then click this window’s OK button to execute your selection. The AssetClasses window’s Explain button provides selection guidelines, data sources and conservative adjustments, and steps to optionally edit or replace asset classes or their data.

In the fourth and last tab-page in the ClientEntries window, shown below, in columns at left you can make initial allocation entries for two portfolio plans for assessment and comparison on PATHFINDER graphs.

To check that the portfolio plans promise positive expected EndValues, which is required for their graphic assessment, click the Xpected EndValue button at bottom.

After completing client entries, to proceed to graph preparation click the OK button at the ClientEntries window’s top right (above the tab-pages).

If your entries are sufficient for Graphs 6-7 or 8, which require preparation time, the small window shown at right will appear. Check for these graphs if you wish and then click the Prepare graphs button.

In developing a typical plan, it makes sense to check Graphs 6-7 but not 8 to select a best portfolio plan. Then with the selected portfolio allocations, prepare the graphs again including Graph 8 for optimizing other key parts of the plan

The OptimizerGraphs window shown below will appear. While graphs are in preparation, a red-and-white bar at the window’s bottom shows which graphs are completed. Completed graphs can be displayed and used interactively while others are still in preparation.

The OptimizerGraphs window has three tab-pages with buttons offering all the PATHFINDER graphs reflecting your entered plan and selected asset classes.

The first tab-page, shown below, offers five graphs of key elements of PATHFINDER analysis which are useful for client education.

The Graph 1 button offers an efficient frontier graph for your selected asset classes, as illustrated below.

With each graph a Toolbox appears with buttons for interactive use of that graph, as illustrated at right below. Each graph’s Toolbox has an Explain button offering an explanation of the graph and use of its tools, and a Copy button for copy-and-paste to place the graph in a document for printing. The Scroll button produces a system for moving on the graph and seeing graphic and numeric illustrations of positions you move to, as illustrated on the graph.

Graph 2 shows long-term compounding, for a series of return rates or for the expected return rates of your selected asset classes. It illustrates how longer investment periods amplify the advantage of higher return rates.

On the graph at right, a window showing an explanation of the graph is shown.

Graph 3a is a compound frontier graph, just like the efficient frontier except that expected returns of the portfolios are shown and compared for your entered plan’s time horizon, instead of just for the single year.

This graph shows that if you move to left along the frontier curve, every little reduction in return-rate standard deviation means a vastly larger reduction in expected long-term return.

Graph 3b uses two of your selected asset classes to illustrate a second long-term effect: standard deviation shrinkage.

It shows that for an investment’s return-rate average, for longer investment periods the standard deviation shrinks.

Graph 3c shows a view of the long-term investor’s advantage, produced by the two long-term effects, compounding and standard deviation shrinkage.

Over longer investment terms, the advantage of higher expected return rate increasingly outweighs the disadvantage of larger return-rate standard deviation. As a result, the investment with higher expected rate and larger standard deviation becomes more and more favorable, not only in long-term prospects but even in long-term risk.

The OptimizerGraphs window’s second tab-page, shown below, offers two graphs showing long-term prospects for your entered plans and portfolios: Monte Carlo simulations, and resulting Probability curves.

Initially the Monte Carlo simulations graph appears without simulation lines. Its Toolbox has buttons for starting the simulations.

When you click the Simulate Plan A button, simulations of your plan with your entered portfolio Plan A begin. A first simulation works its way across the graph, year by year to the end of the plan. Nine more simulations follow. When the ten are completed, the graph appears (depending on the plan) as illustrated below. And a table summarizes end-of-plan results for the ten simulations, as shown at right below.

For client education, this graph can be especially effective. As a simulation progresses year by year, the client senses the ups and downs along the way. But for any client aiming for a long-term goal, when the simulations are done the graph and the table both show that what really counts is where you are at the end.

Graph 5 shows a probability curve for EndValue result for the plan, as illustrated at right. PATHFINDER produces this curve by performing 10,000 simulation runs for the plan.

On this graph you can scroll to various target heights for final result. For each target height you move to, the graph shows a goal line across the graph, and shows the probability of meeting-or-beating that target (above the goal line, in red), and the risk of falling short (below the goal line, in gray).

On each of these two graphs, Monte Carlo simulation and Probability curves, if you’ve entered two portfolio plans A and B, you can show simulations and probabilities for both portfolio plans for comparison.

The graph and table below show simulations for a Plan A portfolio that is largely stocks and a Plan B portfolio that is mainly bonds.

Other products that advise comparing potfolios on just the single-year efficient frontier would classify the blue portfolio as “much less risky”. It’s clear that for individual years, the blue has much smaller ups-and downs. But it’s also clear that for long-term results -- the result that really counts -- the blue plan has far greater risk of a much lower outcome.

When you show both portfolio plans A and B on the Probability curves graph, the graph will appear approximately as shown at right.

This particular graph compares the same two portfolios represented by the simulations just above. It’s clear that for the long-term goal, the blue portfolio plan is virtually certain to produce a result far below most possibilities for the red portfolio plan.

To help clients fully see what the Probability curves show in comparing two portfolios for the client’s plan, use the scrolling system.

At right, we have moved to a target height that the client might name as a goal, in this case 0.20 million dollars or $200,000. The graph shows that red portfolio A offers over 80% probability of meeting-or-beating the client’s target, while the blue has less than 5% probability of doing so.

The OptimizerGraphs window’s third tab-page, shown below, has buttons for PATHFINDER’s long-term optimizer graphs, including Goal Frontier graphs for zeroing in on best portfolios for long-term plans and goals.

The Graph 6 button delivers Goal Frontier A, illustrated at right.

This Goal Frontier is like the one shown in this website’s “Frontiers vs. years” section. Its curve shows portfolios along the frontier identified by Modern Portfolio Theory, assessed and compared for the long term. Its vertical axis compares these portfolios in long-term expected results -- the best single measure of long-term prospects. The horizontal axis compares them in long-term risk as measured by how large a minimum result the client can have a high probability or confidence of meeting-or-beating.

For each Goal Frontier graph, PATHFINDER provides an especially rich set of interactive tool in the Toolbox, as illustrated at far right.

Use of the scrolling system is shown on the Goal Frontier graph at right.

The Graph 7 button delivers Goal Frontier B, shown below and elsewhere on this website. Compared to Goal Frontier A above, what’s different is that on Goal Frontier B’s horizontal axis, the measure of long-term safety vs. risk used to assess and compare the portfolios is probability of meeting-or-beating the client’s stated long-term dollar goal.

On this graph, use of two more interactive tools is illustrated. A click of the Safest button highlights in green the portfolio point that is furthest to right -- the safest according to this graph’s measure of long-term safety vs. risk.

The Competitive frontier button highlights in purple other frontier portfolios that deserve consideration because although they offer slightly less probability of meeting the long-term goal they also offer higher prospects for long-term results. 

For each portfolio point displayed, PATHFINDER runs 10,000 simulations to assess the long-term probabilities.

To reveal the shapes of the curves efficiently, portfolio points are developed at intervals along the curve. For finer analysis of any chosen interval along the curve, you can add portfolio points by scrolling to a desired height and then clicking the Add Point button in the Toolbox.

For any portfolio point shown along a Goal Frontier curve, you can identify the portfolio’s asset allocations by scrolling to just below the height of the point and clicking the Portfolios button in the Toolbox. This will display the Portfolios window illustrated below.

Numerically in a table at left and visually in pies at right, the Portfolios window shows up to four portfolio allocations for the point you moved to on the Goal Frontier. (Some sources indicate that for a point along a frontier curve, only one allocation will do, but in fact at almost any point along the curve there are many allocations too close for practical distinction.) From what this window shows, you can offer the client an allocation choice.

To adopt any of the displayed portfolio allocations, at this window’s lower right select the portfolio’s number and click the Adopt button. Your adopted portfolio will be entered in the ClientEntries window as Plan A, replacing any prior entries there, and PATHFINDER will display the Prepare graphs window for preparation of new graphs relecting your adopted portfolio

After using Goal Frontiers to select a best portfolio plan, if the plan includes retirement years, proceed to Graph 8 to optimize other key elements of the plan.

With the selected portfolio allocations entered, proceed to prepare graphs again, and this time in the small Prepare graphs window, check to include Graph 8, as shown at right.

To prepare graph 8, PATHFINDER develops 10,000 year-by-year simulations for each of hundreds of what-ifs. So depending on the plan and computer, with Graph 8 included preparation of the graphs will take several minutes.

Again as graphs are prepared, the OptimizerGraphs window will show progress in red-and-white at bottom. When all including Graph 8 are ready, the red-and-white will disappear. Select the rightmost tab-page to click the button for Graph 8 as shown below.

Graph 8 appears with a red curve showing how probabilities of meeting goals change through retirement years, as illustrated below.

With this graph the Toolbox appears as shown at right below. You can use tools to add a second horizontal axis showing the years as calendar years or years of client age, and scroll to various years to show their goal-meeting probabilities, as illustrated on the graph below.

This curve provides a valuable additional perspective for financial planners and clients to assess the adequacy of financial plans. Does the plan promise high enough probabilities for meeting goals for long enough?

Through the Toolbox, Graph 8 offers much more. Additional sets of curves show what the curve of goal-meeting probabilities would be if key elements of the plan were changed by various amounts.

For example, the illustration below shows the graph with green lines added to show what the probabilities curve would be if the client changed annual contributions to the Qualified plan. To produce these green lines, in the Toolbox menu select the plan element you waht to consider changes for, as shown at right above, and then click the Add curves button below the menu. 

At the graph’s upper right, text and a box of numbers show what the green lines represent. In this case the lines show what the probabilities curve would be with various annual contributions to Qualified investment; the highest line reflects contributions of $22,000, and so on down to the bottom line representing $2000.

On this graph you can “read between the lines”. For example, a line for $20,000 would be just over halfway up from the $17,000 line to the $22,000 line.

On this graph, as shown at right you can scroll to various years along any of the curves. To choose a curve for scrolling, turn the scrolling system on and then click the number that labels that curve in the box at the graph’s upper right. 

By making other choices in the Toolbox menu, then clicking the Add curves button, you can produce similar sets of curves to explore what-ifs for potential changes in other key factors in the plan. The graph at right shows curves for changes in number of years to retirement.

This graph, at right, has curves reflecting various amounts for the client’s annual retirement budget.

For optimizing among these alternatives, the final choices are not mathematical -- they are judgments of clients and planners. But PATHFINDER’s mathematics and graphing plays a critical role, by calculating and showing visually what the choices are and what they promise in probabilities of meeting goals through retirement years.

For financial planners, these curves can provide a further benefit in client communication. By showing and discussing these curves and the tradeoffs they reveal, you can draw out fuller client expressions of their priorities, to better tailor client plans to their desires and goals.

The bottom choice in the Toolbox menu offers a set of green lines showing what the goal-meeting probabilities will be if the future inflation rate is different from the predicted rate in the plan, as illustrated below.

This factor is different from the others on the menu in that it will be determined by the economy instead of client choice. But for weighing choices among the factors the client and planner can choose, it is most important to see what the probabilities of meeting goals through retirement years will be if inflation is different from prediction -- especially if the inflation rate is higher, as it may be.

With PATHFINDER you can produce complete printed reports in Microsoft Word(TM) format and open them in Word, where you can if you wish customize them in any way.

To prepare a printed client report, first make sure the ClientEntries and AssetClass windows’ contents reflect what you want the report to show, and that the graphs you want to include have been prepared to reflect what is in those windows. Then on the menubar select Reporter to open the Reporter window as shown below.

To produce a report and open it for optional customizing and then printing, follow the six steps shown in the Reporter window. For more information on these steps, click this window’s Explain button.

At left in the window, select a directory for placement of the report file, and enter a new filename for the report file.

At upper center you can choose Full or Short report, and choose to optimize it for color or black & white printing. A full report is over 40 pages, including all eight graphs if the plan enables their production, and four appendices including a year-by-year cash flow table. A Short report is only ten pages, omitting some graphs and the appendices.  For anything inbetween, you can produce a Full report and then eliminate undesired pages in Word.

After completing the preceding steps, at lower center entering your or your firm’s name and the report date for the report’s cover page. Then click the Create button at the window’s upper right. Some seconds will pass as PATHFINDER creates the report as a Word .doc file and prepares and inserts print-optimized versions of the graphs.

When the report is ready, a Word icon will appear at the Reporter window’s lower right as shown in the illustration above. To open the report in Word for optional customizing and then printing, double-click the Word icon. The illustration below shows a Word print preview of six pages of a PATHFINDER printed report.

PATHFINDER also provides unique tools for strongest client communication and education. The printed How-to Guide for this purpose, pictured at right, contains a full and rich series of client questions and suggested planner answers using PATHFINDER graphs for clearest and most memorable visual communication. It contains several series of questions and answers, for communication and education with clients of varying levels of sophistication and interest in the planning analyses and alternatives.

You can use materials in this book in discussions of printed client reports, to improve client understanding of the reports and commitment to the recommended plans.

PATHFINDER’s unique interactive graphs provide tools for more dynamic interactive client communication and education -- especially for two-way communication, which can be of highest value in drawing out fuller client expression of priorities to better tailor the plan to the client’s goals, and for building client appreciation of, identification with, and commitment to the plan. For this especially, the How-to Guide is a helpful tool.

For interactive graphic client communication and education on computer, PATHFINDER offers presentations as subchoices under Educator on the menubar, as shown below.

Of the four choices under Educator, the second and third are intended for planners, as introductions, guides, and examples in use of PATHFINDER.

But the first section, Overview, is a short series of graphs with text explanations that is well suited for clients, as well as very first introduction for planners.

The fourth Educator section, Client ed, is as the name suggests suited specifically for planner education of clients. It contains essentially the same sequence of graphic illustrations as the Overview, but without display of text so the planner can narrate and explain the presentation in his/her own words. And it has its own menu of graphs or topics so the planner can present all or any parts of it in whatever sequence the planner judges best for each particular client. An illustration of the Client ed window is shown below, with its menu of topics or graphs at right and an illustration of the Monte Carlo simulation graph at left.

Once you become familiar with PATHFINDER, especially its unique analyses and interactive graphs, the most effective approach to client communication and education is to use graphs of the client’s own plan, using the scrolling and other interactive tools to draw the client into asking questions, participating in the explorations, expressing preferences that reveal more about the client’s priorities. The better this can be done, the better you can build the client’s appreciation of, identification with, and commitment to the plan.