With the importance of the asset allocation decision to real-world investment results, identification of the important factors in the decision and integration of these factors in a consistently logical manner should be prime concerns of any investor. A simulation program called SIMR allows the investor to isolate the effects of four factors crucial to investment results—risk, return, time horizon and utility preference.

Given the investor’s best estimates of expected return and risk for the relevant asset categories and the correlation coefficient between assets, the program produces for any chosen time horizon and for any number of stock-bond mixes terminal wealth distributions, together with average annual return distributions and associated probability levels. Once the investor has input his desired annual target rate of return and his preferences in regard to loss avoidance and risk aversion, the program can calculate expected utility values for each bond-stock mix.

SIMR allows the investor a cost-effective way to test different assumptions before taking action on real portfolios. Given the uncertainties of the real world, this ability to investigate a range of possible outcomes is especially important. What’s more, the investor can use the probability levels provided by the program in conjunction with appropriate target returns to pursue promising short-run strategies consistent with a long-term investment goal.