ROBOT INVESTMENT CALCULATOR: INTRODUCTION

The Robot Investment Calculator is a unique computing and analytical tool which can save you a lot of money – or earn you a lot of money, according to how you use it. It is a tool for financial consultants, institutional investors and sophisticated private investors. While the Robot Investment Calculator is not primarily intended for day traders and speculators, some of them may find it useful, too.

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INTEREST

Compound Interest Calculator (simple)
It’s easy: just enter any three of four values and a blank field for the value to be calculated. Press the “Calculate” button and the unknown value is calculated instantly.

Note: when working with funds and equities, what is called “compound interest” is, in fact, the average annual compound return. While the arithmetic is the same for fixed income and equity instruments, “return” and “interest” are two fundamentally different concepts.
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The interest calculator does not take account of any risks involved with your savings or investments.

Compound Interest with Savings (enhanced)
This calculator is able to factor in monthly savings. This comes in handy when calculating the effect of regular monthly investments – a common problem dealt with by many financial consultants worldwide.
With this calculator, the fields Starting Amount, Investment Horizon, and Monthly Savings Annual Growth must always have a numeric value (must not be blank).
Any of the three remaining fields (Annual Return, Monthly Savings, and Final Amount) may be used as both input and output variables. Only one field, however, may be left blank. As with the simple calculator, just press the “Calculate” button and the value of the blank field is calculated immediately.
First, enter the initial amount invested (in any currency) into the field Starting Amount. This is a mandatory field.
Secondly, enter Investing Horizon (in years) into the field of that name. This is mandatory, too.
Thirdly, enter any two of the three following values and leave the remaining field blank:

• Annual Return (in per cent, annualised)
• Final Amount (in currency units)
• Monthly Savings (in currency units)

Fourthly, enter Monthly Savings Annual Return in per cent per annum. This is the average compound annual growth of the value of the amount you intend to invest on a monthly basis. It should reflect your (or your client’s) expected annual salary growth.
As with the simple compound interest calculator, no account is taken of any risks involved with your investments.

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BOND FUNDS

While bonds are categorised as fixed income investments, the total return on bonds and bond funds can be surprisingly unfixed. Especially during periods of sustained growth or falling interest rates, bond returns can be highly variable. This even holds for government bonds with excellent credit quality. The risk is not rooted in the possibility of a default or a rating downgrade but in fluctuations (or secular trends) of interest rates or yields.
Very few retail investors realise that even risk-free bonds can produce negative returns under certain circumstances, and that significant risk can lurk beneath the veneer of AAA or “investment grade” bonds.
This calculator provides an easy-to-use tool for estimating possible future returns (or losses) on bonds, or bond funds in particular. Most retail investors buy bonds via mutual funds (US) or unit trusts (UK).
You need to enter some variables, which should be available to the investors through the investment companies or information services such as morningstar.com (US) or morningstar.co.uk (UK).
How to use it:

1. Enter the Yield to Maturity of your bond fund. The YtM is a bond equivalent of the interest rate. It tells you how much interest you will receive per annum in relation to the market price of the bond until maturity, when the bond principal is paid and the bond ceases to exist. For bond funds, the average YtM of the bond portfolio is used.As a source of data, US users can use 30-Day SEC Yield, UK users 12-month Yield, provided by morningstar.com and morningstar.co.uk respectively. While these measures are defined in slightly different ways, each can be used to achieve an acceptable level of precision.
2. Enter Average Effective Maturity. This is the average time to maturity of your bond portfolio. US users: morningstar.com \ Portfolio \ Average Effective Maturity (years) – beware, the indicator isn’t that easy to find.UK users: morningstar.co.uk \ OEIC/Unit Trusts \ Fund Basics \ Effective Maturity – find it in the lower part of the web page.
3. Enter Yield Change in one year – this is the change in the Yield to Maturity which you expect to occur in one year’s time.Unlike the previous values, there’s no particular place to find it. However, if the financial community is speaking of an approaching wave of rising interest rates, it is reasonable to assume that interest rates (or yields to maturity) will be higher in a year’s time. By how much? You can play with scenarios and try out different values to see the effect of rising (or falling) interest rates (yields) on the total return of bonds and bond funds. Caveat emptor: experts and even market consensus can be wrong from time to time, and in no way are you going to be reimbursed for bad investment decisions.
4. Non-mandatory field: You can enter Average Coupon Rate of the bond portfolio. If you don’t know the rate, the Robot Investment Calculator will estimate it automatically.Knowing the Average Coupon Rate increases the accuracy of your calculations. However, in most cases you only need to know it if you’re likely to get more than the current effective yield, about the same, or less than that. The primary objective of the BOND FUNDS module of the Robot Investment Calculator is not achieving double-digit accuracy, but providing compass-like advice: North or South, up or down, sell or buy.
5. Non-mandatory field, under construction: Yield Risk Spread. Including credit risk should improve the accuracy of the calculations, but for the time being, it’s at a highly tentative stage.

Example: Vanguard Long-Term Bond Index Fund Investor Shares, VBLTX

• Open morningstar.com and enter the symbol VBLTX
• Find out the fund’s 30-Day SEC Yield (just below the headline). As of 10 March 2017 it was 3.79 per cent. Enter the figure into the Yield to Maturity field.
• Click on ‘Portfolio’ and find Average Effective Maturity. This was 23.9 years on the same date (but will change, of course.) Enter into the field of the same name in the Robot Investment Calculator.
• Fill in the Yield Change in one year field. Which value, though? Assume that a single percentage point growth of the long-term bond yield will occur in one year.
• Ignore the other two fields and press “Calculate”. You’re going to learn – to your horror! – that a single percentage point yield growth entails a 10.26 per cent total loss! How is that possible when the VBLTX fund only invests in investment-grade bonds? When interest rates grow, bond prices fall, and with long-term bonds they can fall a long way.
• Check the chart depicting the historical total returns of VBLTX. You’ll learn that 10 per cent losses occasionally happen to this long-term bond fund, as well as to long-term bonds in general.

The decision to buy or sell VBLTX is completely up to you. Usual disclaimers apply, and no one will be held responsible if you make a bad decision. The Robot Investment Calculator is just a computing tool, not a machine for making prophecies.
British users can perform a similar exercise with a UK-based unit trust that invests in long-term bonds, such as ICVC-Baillie Gifford Active Gilt Plus Fund B Accumulation (ISIN GB0005770762). The results are likely to be very similar, assuming that the yield changes will be roughly in the same direction and of a similar size.

PORTFOLIO

In previous modules, risk was not an issue. However, risk is inseparable from returns, especially with higher rates of return.
This is what the PORTFOLIO module helps with. It enables you to simulate returns from various portfolio risk profiles, from extremely conservative to very aggressive. It also allows you to simulate the effects of diversification across asset classes.
First, you need to create a portfolio. There are eight asset classes available:

1. US Large Cap Fund: A diversified portfolio (not necessarily a fund) of US large capitalisation stocks. A bread-and-butter choice for most conventional portfolio investors, American or otherwise.
2. Emerging Markets Fund: A portfolio or fund of emerging market stocks. A generic fund is assumed, which means it does not matter if you invest in China or Brazil, Russia or India, South America or Eastern Europe. Why? It turns out that most of the emerging markets show remarkably similar behaviour over time, with surprisingly little contrast across the globe. (You may be tempted to think that the fabulous pace of economic growth in China compared to the mediocre macroeconomic performance of Brazil must be wildly different between say, 2001 and 2017. No, it wasn’t. You would see no difference if you looked at the stock charts without a legend.
3. NASDAQ Index Fund: Everybody knows what the NASDAQ is: a technology-loaded US market, which produces stellar returns in good times and awful collapses in bad times.
4. Money Market: The most conservative investment generally available in the market. It doesn’t return much but is very dependable, almost equivalent to holding cash.
5. Medium Term Bond Fund: A generic bond fund with low credit risk and a medium length of time to maturity. Usually a government bond fund that produces middle-of-the-road returns and risks.
6. Long Term Bond Fund: A generic bond fund with low credit risk and a long time to maturity. See the BOND FUNDS module description to learn more about the risks of long-term bond investing.
7. High Yield Bond Fund: High yield is a euphemism for “high risk”. You can achieve stock-like returns by investing in these instruments, but be prepared for a similar level of risk. However, high yield bonds tend to produce returns with different statistical characteristics from equities, which is why they need to be categorised as a separate asset class. We do not discriminate between US and non-US high yield bonds.
8. Developed non-US Equity: Basically Western Europe, Australia, and Japan. The statistical characteristics of the non-US developed markets differ significantly from those of the US market. This is why this asset class is defined separately.

The portfolio must add up to 100 per cent. No leverage and no short sales are allowed.
Secondly, you must fill in the following fields:

• Lump Sum: The value of your initial investment (currency units)
• Monthly Investment: How much you’re going to invest on a monthly basis (currency units)
• Horizon in Months: Investment horizon, not in years but months!
• Financial Goal: How much you wish to have by the end of the investment horizon (currency units)

Each of the four fields must contain valid numeric input.
Thirdly, when you have selected your portfolio and entered all four necessary inputs, you can press either the Single Run button or the Simulation button. The former will show you one possible simulated scenario of the price development of your portfolio over time. The latter will perform 1000 simulation runs and finally show the statistics:

• Average expected return per annum (per cent)
• Average expected risk (annualised volatility)
• Average final expected portfolio value (in currency units)
• Probability of not achieving your financial goal (per cent)
• Probability of loss (per cent)

A rational investor aims to achieve maximum expected returns while keeping risk to a necessary minimum and maintaining the sound probability of achieving their financial goal. How to you do this? Before the Robot Investment Calculator is equipped with an optimising module, it’s largely up to you.

Enter your portfolio here

See the results in the output window

STOCK MARKET ROBOT

There is a dedicated guide focused on the STOCK MARKET ROBOT dashboard. You can find it under the button Robot Guide.
Note that an internet connection is required to run the module.

RESOURCES

The RESOURCES module basically consists of a web browser, two documents (Introduction and Robot Guide), and several pre-defined external website links. An internet connection is required to show the external links.
The links include:

• Stock Market Trend: This shows you how the stock market price index keeps growing at the same pace as the money supply MZM (Money Zero Maturity) over time. Episodes of an overvalued / undervalued stock market are obvious.
• Profits Trend: Similar to the above, only with aggregate corporate profits rather than a stock market index.
• Taylor Rule: An elaborate yet simple theory developed by Professor John B. Taylor for determining an equilibrium value of the short-term interest rate. In other words, it calculates what the US federal funds rate should be, as a function of the output gap and current inflation. The Taylor rule may come handy when guessing future interest rate changes for the BONDS CALCULATOR.
• More Reading: Food for thought. Enjoy.

MESSAGES

This module allows you to send messages to the author of the Robot Investment Calculator. You have the possibility to ask questions and propose improvements. You can also receive messages and hints from the author. Worth following!
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In addition to that, the module includes everything that didn’t fit into other modules: about the author, send/receive messages (under construction until new version is released), currency choice button (USD/GBP toggle for the time being), and, last but not least, the highly useful QUIT button.


Pavel Kohout, 17 April 2017
pavel.kohout@robotsicav.com