INNOVATION: TECHNOLOGY

The Road Ahead

Knowing where you’re going is one thing, but actually getting there depends on a whole host of random variables. Unlike other facets of life where randomness, or “risk”, is something to be avoided, investment risk is the force that drives returns. But just like the explosive power of gasoline within an engine, risk has to be understood and controlled in order to make it productive.

Forecasting the "Whether"

Getting a handle on risk in a portfolio context is no small task. The hundreds of random variables cannot easily be reduced to a single statistic. These variables and their interactions can, however, be reasonably modeled with a computer. And while a computer cannot predict the future, it can simulate possible future scenarios. Modeling hundreds of these scenarios gives us an understanding of the range of possible future pathways for a portfolio and allows us to measure the impact of various portfolio management techniques on the outcomes. This range of portfolio outcomes becomes a tangible representation of portfolio risk.

Use Our MAPS™

The technique we just described is often referred to as “Monte-Carlo Simulation,” and it is a powerful tool for understanding complex systems when they can be modeled. Compass has developed its own software called Monte-Carlo Asset Projection System, or MAPS™, for modeling the complexities of an investment strategy that encompasses multiple investment portfolios. MAPS™ can accommodate:

• Multiple distinct asset pools
• Portfolios with different tax statuses

• Varying levels of liquidity
• Anticipated future contributions
• Stock options
• Anticipated future transfers between asset pools
• Impact of spending policies (endowments)
• Impact of rebalancing criteria