Help modeling investment against historical data

Fo the sake of discussion - I have one investment consisting of one asset classs and I have the historical data for that asset class going back to

1926. Here are the givens:

  1. I have the investment account set up such that its total return is comprised of 4% Dividend and 6% Unrealized Gain. -- the account has a zero basis.

  1. The historical data is yearly total returns with dividends reinvested.
  2. My model will include both deposits and withdrawals to the account.
  3. I want to include an effective tax rate in the model to show the tax consequenses of the withdrawals as well as the dividends.

The only thing I want the model to show is how my present investment would do over the course of the historical data.

I realize that there are programs out there that can do this. Fidelity will take my portfolio and project it against hisorical data, but I would like to do this myself so I can expand it to my entire portfolio and various types of events affecting the portfolio.

My first cut was -- each year apply that years total return to the current balance.

Then is was pointed out that some of the historical returns were negative - and it went down hill from there.

  1. How do I account for the dividend with a negative total return?
  2. Since my model include withdraws and dividends - there are tax consequenses. My account has a total return of 10% -- how do I model this against a historical return of 25% or even worse -25%?

I searched the internet and could find any references to this particular circumstance. If anyone knows of a reference I can use I would appreciate it. If you can give me some pointers on how to accomplish this that would be great also.

Or it may be the wrong group -- if so I apologize.

Thanks,

JW

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Reply to
JW
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1) You design an "investment experiment", example 50-50 stock-bonds invested for five years. 2) Then you run the experiment starting for each year of your data (or smaller intervals if you have finer data). 3) You count up the results. You might take each result, sort them by amount and graph this in Excel. For the example, the balanced investment you may find 85% of the experiments have positive return- the middle of the graph (median) is 40% (8% APY), the extremes are

-15% and +200%, etc.

You can make the experiment as complicated as you want, but might have to write a computer program, or Excel equation to calculate it. You might decide to run for the whole 20th century, or last half depending on whether you believe the economy was different then, etc.

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Reply to
rick++

I think your problem is that you're modeling dividends as a proportion of total return rather than as a percentage of the account value at the beginning of each period. The latter will result in the dividend always having the right sign and will keep it from being a huge proportion of your return in high return periods.

Good luck,

-Will

william dot trice at ngc dot com

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Reply to
Will Trice

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