Automated Investor

Methodology and Assumptions

Monte Carlo Simulations

The Automated Investor service generates illustrative ETF portfolios and projected retirement savings based on each investor’s inputs, taking into account the investor's current age, retirement savings, anticipated retirement age, and risk tolerance. The potential returns are generated by a Monte Carlo simulation, which is a statistical modeling technique that forecasts a set of potential future outcomes based on the variability and central tendencies we believe are associated with relevant investments. The performance charts illustrating the Monte Carlo portfolio returns are based on the 35th percentile performance results of 6,000 scenarios. The 35th percentile outcome is a projection for which 35% of all the simulations resulted in a lower or equal projected return and 65% of all the simulations resulted in a higher projected return. When a range of outcomes is shown, the upper end of the range is the 85th percentile outcome and the lower end of the range is the 15th percentile outcome. The projected growth rate and the projected total value of the portfolio are not adjusted for inflation. The simulation runs over a maximum investment horizon of 50 years. The outcomes presented using the Monte Carlo simulation represent only a few of the many possible outcomes. The simulation determines the probability of outcomes resulting from the asset allocation choices and underlying assumptions regarding rates of return. Such probabilities are not guarantees of investment return.

In the Educational Service, retirement saving projections are based on the investor’s target portfolio and assume quarterly rebalancing. Both current and target portfolio projections in the Educational Service are net of fund expenses but do not take into account management fees, commission fees, taxes or other miscellaneous fees and expenses that you may incur through any other investment management or brokerage service, which if included would reduce the portfolio's performance.

In the Automated Investor service, retirement savings projections assume quarterly rebalancing, are net of fund expenses, and are net of the annual advisory fee. Taxes are not considered in these projections.

The investments shown in the Automated Investor service reflect those funds in each asset class that have been determined to align with the risk and return characteristics of a particular asset class. Other investments not considered may have characteristics similar or superior to those that are analyzed by the Automated Investor service.

Since past performance and market conditions may not be repeated in the future, your investment goals may not be fulfilled by following advice that is based on the projections, which do not reflect the performance of actual accounts. Actual investment outcomes may vary. There can be no assurance that an investment mix or any performance shown on the Automated Investor website will lead to the expected results shown or perform in any predictable manner. It should not be assumed that investors will experience returns in the future, if any, comparable to those shown or that all of the Automated Investor service’s investors experienced such returns. The validity of the analysis generated is in part dependent upon the accuracy of the data entered by the investor.

Differences in account size, age of investor, risk tolerance, timing of transactions and market conditions prevailing at the time of investment may lead to different results, and investor may lose money.

Capital Market Assumptions (As of 5/16/2018)

The target portfolio construction used for the Automated Investor service is based on capital market assumptions provided by U.S. Bank Wealth Management (“Capital Market Assumptions”). The Capital Market Assumptions refer to U.S. Bank Wealth Management’s return expectations, volatility of returns, and correlation of various asset classes used as investment model components for each asset class. Correlation measures how asset classes move in relation to each other. These assumptions are based on historical asset class returns (as reflected by certain indices), proprietary models, and U.S. Bank Wealth Management’s subjective assessments of current market environment and forecast of likelihood of future events.

INDEX

ASSET CLASS

Annual Expected Return

Annual Expected Risk

Wilshire 5000 Total Market Full TR USD

U.S. Equity

8.20%

15.70%

MSCI EAFE GR USD

Inter Dev Equity

9.69%

17.10%

MSCI EAFE GR USD

Inter Emg Equity

11.08%

23.90%

Barclays US Agg Bond TR USD

U.S. Core

2.23%

3.30%

Barclays Municipal TR USD

U.S. Municipal

1.80%

4.50%

Bloomberg Barclays U.S. TIPS

U.S. TIPS

1.91%

7.70%

BofAML US HY Master II TR USD

U.S. High Yield

4.09%

8.30%

Barclays Global Treasury Ex US TR USD

Inter Dev Debt

0.42%

8.30%

JPM EMBI Global TR USD

Inter Emg Debt

5.20%

11.00%

DJ US Select REIT TR USD

U.S. Listed

7.68%

18.90%

S&P Developed Ex US REIT GR USD

Foreign Listed

6.33%

15.80%

N/A

Cash

1.66%

0.30%

Wilshire 5000 Total Market Full TR USD

U.S. Equity

8.20%

15.70%

MSCI EAFE GR USD

Inter Dev Equity

9.69%

17.10%

MSCI EAFE GR USD

Inter Emg Equity

11.08%

23.90%

Barclays US Agg Bond TR USD

U.S. Core

2.23%

3.30%

Barclays Municipal TR USD

U.S. Municipal

1.80%

4.50%

Bloomberg Barclays U.S. TIPS

U.S. TIPS

1.91%

7.70%

BofAML US HY Master II TR USD

U.S. High Yield

4.09%

8.30%

Barclays Global Treasury Ex US TR USD

Inter Dev Debt

0.42%

8.30%

JPM EMBI Global TR USD

Inter Emg Debt

5.20%

11.00%

DJ US Select REIT TR USD

U.S. Listed

7.68%

18.90%

S&P Developed Ex US REIT GR USD

Foreign Listed

6.33%

15.80%

N/A

Cash

1.66%

0.30%

U.S. Bank Wealth Management typically reviews the assumptions annually. Long-term capital market assumptions are subject to high levels of uncertainty regarding future economic and market factors that may affect actual future performance. There is no guarantee that the Capital Market Assumptions will be achieved, and actual returns could be significantly higher or lower than those shown. The Capital Market Assumptions should not be relied on as a forecast or prediction of future events, and they should not be construed as guarantees as to returns that may be realized in the future from any investment or asset class described herein. Ultimately, the value of these assumptions is not in their accuracy as estimates of future returns, but in their ability to capture relevant relationships and changes in those relationships as a function of economic and market influences.

Because of the inherent limitations associated with the use of illustrative portfolios based on capital markets assumptions, you should not rely exclusively on the asset allocations, portfolios or funds shown in the Automated Investor service when making an investment decision. If you have any questions or concerns, contact us to consult with an investment professional at usbancorpinvestments@usbank.com. The illustrative portfolios cannot account for the impact that economic, market, and other factors may have on an actual investment portfolio. Unlike actual portfolios, the asset allocations shown in the Automated Investor service do not reflect actual trading, liquidity constraints, fees, expenses, taxes and other factors that could impact your realized future returns.

Past performance is no guarantee of future results.

Indexes are unmanaged and one cannot invest directly in an index.

  • The Wilshire 5000 Index is a market capitalization-weighted index composed of more than 6,700 publicly-traded U.S. companies and is designed to track the overall performance of the American stock markets.
  • The MSCI EAFE Index includes approximately 1,000 companies representing the stock markets of 21 countries in Europe, Australia and the Far East (EAFE).
  • The MSCI Emerging Markets Index is designed to measure equity market performance in global emerging markets.
  • The Bloomberg Barclays Aggregate Bond Index is a broad-based benchmark that measures the investment grade, U.S. dollar denominated, fixed-rate taxable bond market, including Treasuries, government-related and corporate securities, mortgage-backed securities, asset-backed securities and commercial mortgage-backed securities.
  • The Bloomberg Barclays U.S. TIPS Index includes all publicly issued, U.S. Treasury Inflation-Protected Securities that have at least one year remaining to maturity, are rated investment grade and have $250 million or more of outstanding face value.
  • The Bloomberg Barclays U.S. Municipal Bond Index is a broad-based benchmark that measures the investment grade, U.S. dollar denominated, fixed tax exempt bond market. The index includes state and local general obligation, revenue, insured and pre-refunded bonds.
  • The BofA Merrill Lynch U.S. High Yield Master II Index is a commonly used benchmark index for high yield corporate bonds and measures the broad high yield market.
  • The Bloomberg Barclays Global Treasury ex-U.S. Index includes government bonds issued by investment-grade counties outside the United States, in local currencies, that have a remaining maturity of one year or more and are rated investment grade.
  • The J.P. Morgan Emerging Markets Bond Index Global (EMBI Global) tracks total returns for traded external debt instruments in the emerging markets.
  • The Dow Jones Select REIT Index intends to measure the performance of publicly traded REITs and REIT-like securities. The index is a subset of the Dow Jones U.S. Select Real Estate Securities Index (RESI), which represents equity real estate investment trusts (REITs) and real estate operating companies (REOCs) traded in the United States. The indices are designed to serve as proxies for direct real estate investment, in part, by excluding companies whose performance may be driven by factors other than the value of real estate.
  • The S&P Developed ex-US REIT is a member of the S&P Global Property Index series and serves as a comprehensive benchmark of publicly traded equity REITs domiciled in developed markets.

Tax Loss Harvesting Analysis

The Automated Investor service tax loss harvesting strategy enables U.S. taxpayers to potentially offset capital gains with capital losses in order to reduce or eliminate federal and state income tax obligations. Compounding this annual return over time can mean a significant amount of additional income at retirement.

The Automated Investor service's automatic tax loss harvesting should not be interpreted as tax advice and there is no representation that the tax consequences detailed will be obtained or that the tax loss harvesting strategy will result in any particular tax consequence. Investors should consult with their personal tax advisors regarding the tax consequences of investing through the Automated Investor service and engaging in this tax loss harvesting strategy, based on their particular circumstances. The Automated Investment service assumes no responsibility for the tax consequences to any investor of any transaction.

Portfolio Risk

The Educational Service analyzes the investor’s portfolio risk by estimating annualized volatility. It assesses the investor’s current portfolio at an asset allocation-level, and does not take into account information at the security-specific level, such as the individual securities the investor holds. The inputs used in the computation are the investor’s current portfolio allocation, assumed annual volatilities per asset class, and assumed correlations between asset class returns.

In order to compare the current risk level to target portfolio risk levels, the Educational Service also estimates the annualized volatilities of the target portfolios at each risk tolerance level. It uses the target portfolio allocation as an input; the calculation is otherwise the same as the investor’s current portfolio risk. The target portfolio risk level is the annualized volatility of the target portfolio.

In order to determine whether an investor’s portfolio is considered “on track” or “off track”, the Educational Service computes the absolute difference between investor’s current portfolio volatility and the annualized volatility of the target portfolio* at each risk tolerance level. The risk level associated with the lowest absolute difference is the current risk level. An investor’s portfolio is considered “off track” if: (i) the investor’s current risk level is different from the investor’s target risk level; or (ii) the investor’s portfolio volatility is more than 1% above the volatility of the aggressive target portfolio; (iii) or the investor’s portfolio volatility is more than 1% below the volatility of the conservative target portfolio. Otherwise, the investor is considered “on track”.

* The target portfolios are based on the investor’s time horizon.

Asset Allocation

In order to determine whether the investor’s current allocation provides a satisfactory level of expected return, the Educational Service employs a scoring method to compare the asset allocation of the investor’s current holdings with that of the target portfolio.

Uninvested Cash

The Educational Service identifies any cash (currency or cash equivalent securities) held within an account aggregated or manually reported by a client or investor. We take the aggregate amount of cash across all accounts in the portfolio and apply the Monte Carlo simulation methodology to estimate how the idle cash could grow if invested. Cash left uninvested is assumed to grow at an annual rate as determined by the Capital Market Assumptions.

Fund Fees

The Educational Service estimates the annual amount the investor is currently paying in fund fees. This does not include trade commissions, loads, or redemption fees. The annual fee amount is compared to the annual fund fees the investor would see if completely invested in the target portfolio. Note that actual results may vary if the investor enrolls in the Automated Investor service, since we may decide not to trade out of some holdings if the cost of the trade outweighs the benefits.

The Bottom Line - “Portfolio Health”

Your portfolio “health” is the dollar impact difference between current and target portfolio projections. This projected performance does not represent the projected performance of the actual securities held in your current portfolio or to be held in your target portfolio, rather the Monte Carlo simulation is based on the expected returns of the applicable asset classes in your current and target portfolios, net of estimated fund fees. Diversification and asset allocation strategies do not guarantee low volatility, profit or protection against loss.