I recently purchased ESPlanner from www.esplanner.com. The software is a financial planning package developed by Laurence Kotlikoff, Professor of Economics at Boston University, and Dr. Jagadeesh Gokhale, Senior Fellow at the Cato Institute. Having played around with it for about a week, I figured I would post my initial thoughts.

First, the idea of the software is "consumption smoothing". In other words, the goal of the software is to attempt to generate a level standard of living throughout the user's life. It does this by varying the amount saved or dissaved year-by-year. I think this is a great concept, because it is a more holistic approach, taking into account changes in household size (children being born and moving out), housing costs (buying or selling a home), large one-time purchases (vehicles, vacation homes, etc), and one-time windfalls (inheritances), as well as a host of configurable events, or ongoing or recurring situations. The software creates a detailed plan on how much to save or dissave (spend down savings) each year in order to maintain a smooth living standard per adult. ESPlanner takes into account economies of scale, so a 2-person household can live as cheaply as 1.7 single-person households. Likewise, as household members are added, there are similar economies of scale. It is very computationally intensive and generates a lot of data in spreadsheet form, along with a consolidated PDF summary report.

Now to the negatives. The design of the software is quite spartan. The interface reminds me of freeware, which is not a compliment. I noticed a number of small bugs, none of which made the software unusable but were nagging nonetheless.

For younger people, I would take ESPlanner's recommendations with a grain of salt. The software requires many detailed projections of expenses, income, savings, household changes, etc. Any error in these projections could have a big effect on your plan and could throw off your projections. For older people who are approaching retirement, the variables are fewer and less fuzzy, and the projections are probably more accurate.

I wanted to go over my investing strategy, since it seems a little unorthodox (but really isn't). My wife and I follow Scott Burns' 10-speed portfolio. Mr. Burns (a finance columnist for the Dallas Morning News and USAA) is more famous for his Couch Potato portfolio, which is equal parts Total Stock Market index and Treasury Inflation Protected Securities. Since this is 50% bonds, it is a bit conservative for me (although ironically it has outperformed the S&P 500 over the last 5 years).

Luckily, Mr. Burns has created more complicated versions of his CP portfolios, with equal parts of different asset classes, up to the Ten-Speed, which has 10 equally-sized different "blocks" in it. Here is the breakdown of the Ten-speed:

Block 1: Domestic total stock market
Block 2: Treasury Inflation Protected Securities
Block 3: International total market
Block 4: International bonds
Block 5: REITs
Block 6: Energy
Block 7: Large U.S. value stocks
Block 8: Small U.S. value stocks
Block 9: Emerging markets
Block 10: International value stocks

The reasons I like this portfolio:

-It is aggressive. With 80% equities, it fits my risk profile. In my case, I slightly modified Block 4 to use International Inflation-Protected Bonds, so all my bonds will keep up with inflation. I see inflation as a big problem in the future with all our government's pending obligations. The only real way to fund these obligations will be to print lots of money, which causes inflation.

-It is simply to implement and maintain. Simply total your portfolio, move the decimal point one digit to the left, and you've got your allocation in each block. Rebalancing is just as easy.

-It can be very cheap to own. I use Vanguard funds and ETFs whenever possible. Because of this, the average expense ratio for my portfolio is around 0.50%. I have read numerous studies that the best indicator of future performance is low expenses. Almost all of the 10-speed blocks are available as index funds or ETFs, which makes it relatively easy to find cheap choices for the blocks.

-It is diversified. With about 27% in large cap US stocks, 13% in small cap US stocks, 20% in international stocks, 10% in emerging markets, 10% in REITs, and 20% in inflation-protected bonds both here and abroad, it is not concentrated in any one asset class. This meshes nicely with David Swensen's investing strategy. Swensen is the incredibly successful manager of Yale's endowment, which has returned over 15% a year for the last 10 years. Swensen does not advocate holding large portfolio holdings in any one asset class.

The one thing I don't like about this fund is that it can require a lot of money to fund the minimums on 10 funds. Since our retirement accounts are split between 4 different accounts, we couldn't have 10 funds in each account and still make the fund minimums. The way I have gotten around that is to spread the 10 funds over 3 of the accounts. The 4th account is a 403b which has limited fund choices, so I use a more traditional asset allocation there. Once we've gotten large enough balances built up in the other 3 accounts, I plan to institute 10-speed portfolios in each one, which will make management easier.

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