Forecasting Portfolio Balance Using Return Mean, Standard Deviation and Spending

Abstract

This paper develops an integrated formula using return mean, standard deviation and spending to forecast the ending balance of a portfolio. The forecasted ending balances were robust when tested over a variety of time periods, spending percentages, and varying how the spending was calculated.This formula is useful for a variety of stakeholders – for government regulators to see how a change in required spending percentages would affect the long-term viability of institutions, for those institutions in understanding how the standard deviation (as a proxy for volatility) affects the portfolio balance, and for investment committees in understanding the trade-off between return and volatility and the resultant effect on the portfolio, among others.