Investment Projections

How do you generate your investment projections?

Netwealth’s investment projections are based on a set of forward looking assumptions for market returns, an assumed volatility of those returns and the choice of portfolio Risk Level. The forward-looking assumptions for market returns are derived from:

  • An analysis of historic real returns (i.e. returns above inflation);
  • An assumption of future inflation of 2%; and
  • Where appropriate, adjustments based on future expectations of particular asset classes. As an example, assumed forward looking returns for UK gilts have been adjusted down, since historic total returns have been considerably higher than can reasonably be expected looking forward.

The range of potential future portfolio values are calculated based on a simulation of thousands of different market return scenarios. In order to create these simulations, we use what is called a “mean reverting stochastic model”, which takes into account the average return expectations, a measure of the expected variability of those returns (the “volatility”) and an assumption that returns will have a tendency to revert towards the average return over the long term (which stops the model generating completely unrealistic scenarios).
Each simulation will be different, ranging from very strong returns to very weak returns and including different combinations of strong and weak periods. After we have run thousands of simulated paths for the value of the portfolio, we then calculate and plot the range of values in incremental bands, with each band showing the range of values for each date for 5% of the different simulations.
The projected portfolio values take into account the choice of Risk Level, account type (including an adjustment for income and capital gains tax, for taxable accounts), initial contribution, ongoing monthly contributions, monthly withdrawals, and fees both for Netwealth and for the underlying fund investments.
The resulting chart shows an illustrative range of possible outcomes for the portfolio value, although the future value can of course be lower or higher than any of the values plotted. In order to help interpret the chart, values for illustrative “weak”, “average” and “strong” market return scenarios are highlighted when you hover your mouse pointer over the projection chart, which correspond to the 10th, 50th and 75th percentiles respectively. We also calculate the comparable value if you had not invested your money.
The “Potential Range of Outcomes” section considers how your portfolio would perform under each of these market return scenarios compared to your chosen investment goal, and indicates whether or not your goal would have been achieved and with what shortfall or excess value.

What assumptions have you used for tax rates when showing projections net of tax for taxable accounts?

Projected investment returns for the General Investment Accounts (GIA) and Junior Investment Accounts (Bare Trusts) are shown net of income and capital gains tax, calculated using tax rates corresponding to the tax band selected:

Tax Band Interest Income Dividend Income Capital Gains
Tax Free 0.0% 0.0% 0.0%
Basic Rate 20.0% 7.5% 10.0%
Higher Rate 40.0% 32.5% 20.0%
Additional Rate 45.0% 38.1% 20.0%

The projections incorporate ongoing deductions for income and capital gains tax based on these tax rates. Income tax deductions use estimates for each Risk Level of (i) portfolio income yield and (ii) the blend of dividend and interest income. Net income is assumed to be reinvested in the portfolio on an ongoing basis. Deductions for capital gains tax are made based on the capital return (with the total investment return of the portfolio equal to the income plus the capital return), and makes allowance for cumulative losses from previous tax years. Deductions for tax do not take into account any annual tax-free allowances for either capital gains or income tax.
Below we show a simplified example of a £100,000 portfolio invested over 5 years. The portfolio has income and capital gains tax deducted based on a higher rate taxpayer, with a 2% income yield made up of 1% interest income taxed at 40% and 1% dividend income taxed at 32.5% (and therefore a blended income tax rate of 36.25%), and capital gains taxed at 20%.

Year Portfolio Value Start Income Yield (%) Capital Gain (%) Total Return (%) Income Income Tax (@ 36.35%) Capital Gain Losses Brought Forward Net Gain Capital Gains Tax (@ 20.0%) Portfolio Value End
1 £100,000 2.00% 4.90% 6.90% £2,000 £800 £4,900 0 £4,900 £980 £105,120
2 £105,120 2.00% - 7.50% - 5.50% £2,102 £841 - £7,884 £0 - £7,884 £0 £98,497
3 £98,497 2.00% 6.10% 8.10% £1,970 £788 £6,008 - £7,884 - £1,876 £0 £105,688
4 £105,688 2.00% 4.70% 6.70% £2,114 £846 £4,967 - £1,876 £3,092 £618 £111,305
5 £111,305 2.00% - 1.20% 0.80% £2,226 £890 - £1,336 £0 - £1,336 £0 £111,305