In this Basic Tutorial we will walk you through the steps required to model investing in stocks using the Real Estate Financial Planner™ software.
You can copy this Scenario to your own Planner™ and modify it to do your own testing.Copy Scenario into my Real Estate Financial Planner™ Software
1. Create a New Scenario
Use the steps outlined in How to Add a Scenario to create a Scenario.
For this demo we are going call the Scenario: How to Model Investing in Stocks, but you can really name it whatever you’d like.
2. Add Account to Scenario
We are going to model investing in stocks by creating an Account as your stock market brokerage Account.
Use the How to Add an Account blog post to add a new Account to your Scenario.
We’re going to name the Account: Stock Brokerage Account, but when creating your own scenario use whatever name suits your needs.
We’re going to leave Date Opened blank so that it runs for the full duration of the Scenario.
And, for this example, we will use $50,000 for the Opening Balance. This will model us starting with $50,000 in the Account invested in the stock market. Of course, you can copy the Scenario to your Planner™ and use whatever numbers you’d like.
Since we’re going to start with the simplest way of modeling an account of stocks, we will enter in a Yearly Rate of Return for what we think the stocks that we are investing in with this Account will give us for a yearly return. You can use whatever number you want for Yearly Rate of Return that best approximates what you think you can earn with your particular portfolio of stocks.
Some folks will choose to create multiple Accounts with different Yearly Rates of Return to model different stock holdings. For example, you might create the following Accounts:
Or, you may want to split them into:
- Income Stocks
- Value Stocks
- Growth Stocks
Another option would be to break down your stocks in separate Accounts based on the amount of capitalization the stocks have. Or, maybe you have separate Accounts for each different stock you hold. Each Account can have its own independent Yearly Rate of Return. This gives you the ultimate flexibility to model it how you’d like.
The Real Estate Financial Planner™ software is refreshingly complicated; you have full control over how you model your investing strategy. We are trading simplicity for massive amounts of control on how you do your own modeling.
For the sake of this demo, we are going to use a single Account that holds a diverse portfolio of stocks. You could enter whatever you think this diverse portfolio of stocks is earning each year. Copy the Scenario to your Planner™ and use whatever number you’d like. For the sake of this demo, we’ve chosen 8% for the Yearly Rate of Return for stocks.
The following is what the Account page would look like just after we saved it but before we’ve added it to the Scenario.
3. Add Account to Scenario
Once you have created the Scenario and created the Account, you need to make sure you are including the Account in the Scenario.
Go the Scenarios page and click on the Scenario name to edit it. From this page click on the button next to the Stock Brokerage Account to add it to this Scenario, as shown in the image below.
4. Run Scenario To Model Investing in Stocks with a Fixed Yearly Rate of Return
This will queue your Scenario to run. Depending on how many other users are in front of you, it make take a few minutes for your Scenario to start processing. While you are queued up your Scenarios page will look like this.
Once your Scenario gets picked up to run, your Scenario will look like this while the Real Estate Financial Planner™ software is processing it.
For simple Scenarios, it might take a few minutes to run your Scenario. Once it is done running, the Scenario will show as COMPLETE and list the number of months that it finished processing for you. Here’s what it might look like for this Scenario.
5. View Key Charts
After your Scenario has run, you can view the Charts you’d like to look at for this Scenario.
A couple of relevant ones for this Scenario might be:
- Net Worth and Net Worth Inflation Adjusted
- Account Balance
- Cumulative Deposits
- Cumulative Returns
- Cumulative Deposits and Returns
- Total Return This Month
- Yearly Rate of Return
The default Chart when you click to the Charts page should be Net Worth. Here is the Net Worth Chart of starting with $50,000 and getting an 8% return for 480 months.
As you can see, this is a simple Chart showing that you started with $50,000 and that $50,000 grew to be over a million dollars over 480 months (40 years).
If we click on the Inflation Adjusted button on the Charts page, it will take the Net Worth and adjust for inflation based on the Inflation Rate you specified for this Scenario. Here’s a chart showing the Net Worth adjusted for inflation.
As you can see in the Chart above, the inflation adjusted Net Worth after 40 years is just over $800,000 instead of just over one million dollars. That means it is like having $800,000 in today’s dollars even though you have $1,000,000.
Since this Scenario really is just this one stock brokerage account, your Net Worth is essentially the same as looking at the Chart for Account Balance.
There are a couple other interesting Charts as well for this. For example, you may want to look at Cumulative Deposits that shows how much you invested into this Stock Brokerage Account over time.
As you can see, you started with the $50,000 opening balance and did not deposit any additional money. With more complicated Scenarios, this becomes much more interesting.
What if you just wanted to see how much return you received on the initial $50,000 investment (not just the total account balance, but a running total of how much return you received? That’s the Cumulative Returns Chart show below.
Sometimes you may want to see how much you’ve added and how much return you’re receiving on the same Chart. We call that Cumulative Deposits and Returns. Here’s what that looks like.
What if you don’t want to see the cumulative return, but just how much the return was for that month only. That’s the Total Return This Month Chart and it is shown below.
Of course, you could see this Chart (or really any Chart) as the Inflation Adjusted version of it by selecting the Inflation Adjusted button on the Charts page.
The last Chart I will share with you related to this is the Chart that shows the Yearly Rate of Return. Since we had this Scenario run a stock brokerage account that had a fixed 8% yearly rate of return, as you’d expect, this Chart is really boring.
But, what if we ran another Scenario that did a better job modeling the more erratic rates of return that we might truly expect in the stock market? I’ll cover that next, but before I do that, I want to remind you that if you want to copy this Scenario to your Real Estate Financial Planner™ software you can do so with the link below.Copy Scenario into my Real Estate Financial Planner™ Software
Copying a Scenario To Make Changes
IMPORTANT NOTE: The following are Premium features.
Rename the copied Scenario whatever you want. For our demo, I’ve called it How to Model Investing in Stocks – Variable Return.
Add A Rule To Make Returns Variable
Now, let’s add a new Rule that makes the Yearly Rate of Return for the Stock Brokerage Account more erratic.
Follow the instructions on How to Add a Rule and add the Set Value On Accounts rule.
Allow the Rule to run for the entire Scenario by leaving Rule Start Date and Rule End Date blank.
Select How to Model Investing in Stocks – Variable Return as the only Scenario to run the Rule on.
Select to run this Rule just on the Stock Brokerage Account.
Select Yearly Rate of Return as the Account Variable you want to change and we can use the Monte Carlo features to set the value for Yearly Rate of Return.
Of course, you can set them to be whatever you’d like them to be, but I’ll use -16% to +32% with a standard deviation of 8 and use steps of .1. I’ll go into a lot more detail about using Monte Carlo in another demo, but, for now, here’s what running 5,000 sample data points looks like.
Here is how we’ve filled out the Rule options.
When we rerun this new Scenario, we get different results than when we ran it with a fixed Yearly Rate of Return on the previous Scenario.
For example, when I chart Net Worth for both Scenarios on the same Chart, this is what it looks like:
Similar Net Worth, but not quite the same as the fixed Yearly Rate of Return Scenario that we started this demo with. If I were to run the Scenario with the variable return again, you would see that I’d get a slightly different return. I’ll make a copy of that Scenario to show you.
Each time I create another copy of the Scenario and rerun it, I get a slightly different outcome… because the Yearly Rate of Return on those is random using the values I shared above. And since the stock market is volatile with no guaranteed rate of return this makes for an appropriate prediction of potential outcomes.