Better Computer Models Enhance Financial Planning Web Sites

Funny thing about the Web. What was revolutionary two years ago is practically commonplace today.

Back in 1998 when Nobel Prize winning economist William Sharpe went online with FinancialEngines.com, the site seemed nothing short of awesome. For the first time, average investors had direct access to sophisticated computer-modeling software that could custom-design their retirement portfolios. All you had to do was follow the program's recommendations as to which mutual funds to include in your 401(k) plan or IRA, then contribute the prescribed amount from your paycheck each month. And if you were diligent about saving, time-tested laws of modern portfolio theory and mathematical odds usually showed you had a decent chance of a comfortable retirement. What could be simpler?

Now, just two years later, financial planning tools similar to those used at FinancialEngines.com can be found all over the Web. Among them: Morningstar's ClearFuture, Financial Plan Auditors and Quicken.com's 401k Advisor. I wrote about these in a column last March.

Three of the newest entrants, FinPortfolio.com, ValuEngine.com and OnMoney, incorporate several useful new applications that, until now, haven't been available together at one Web site. Let's take a closer look.

FinPortfolio.com

Cost: Free, but plans are to begin charging $30 per quarter sometime over the next several months.

FinPortfolio.com's core application is an industry-standard financial planning tool that tells you how to divvy your stock and fund holdings among asset classes (stocks, bonds, cash) in order to reach your goals. However, the site goes a step further by letting you deconstruct your current portfolio. It's a little like getting a physical. Enter the funds and stocks you currently own and FinPortfolio.com shows you how to rebalance them, adding to some, subtracting from others. Often, this rebalancing means you can achieve a higher-than-expected return with the same amount of risk exposure as your current portfolio.

Here's an example that uses stocks and funds included on the site's own demo. Let's say you currently own stock in Microsoft (MSFT Quote), American Express (AXP Quote) and Wal-Mart (WMT Quote). Additionally, you own three mutual funds: (BSCFX Quote)Baron Small Cap, (JANSX Quote)Janus and (JAWWX Quote)Janus Worldwide fund. FinPortfolio.com's analysis tool will tell you the optimum portion of your portfolio to allocate to each of these positions.

It might tell you to up your current position in Microsoft from 11% to 31%. At the same time, it might recommend that you cut back on the Baron Small Cap fund from 25% to just over 5%. The end result of these tweaks in this particular portfolio would be an annual return projected to be six percentage points higher -- with the same level of risk.

While some of this site's competitors expect you to blindly follow the computer model's advice, FinPortfolio.com gives you some needed flexibility. For example, you can tell the model what parts of your current portfolio you definitely want to keep, as well as those parts you wouldn't mind dumping. In other words, if you believe the modeling software has it all wrong about those beaten down Internet stocks in your portfolio, you could tell the model just that, and it will adjust its results accordingly.

FinPortfolio.com also allows you to seek out higher returns in exchange for greater risk. The optimized portfolio it spits out is one of dozens the computer model creates. A simple click lets you see how your portfolio would be rebalanced if you opted for a higher risk and higher return.

I have to admit, I like the fact that FinPortfolio.com lets you override its model and take on some of the decision-making yourself. Computer models are great and all, but I seriously doubt they're a substitute for the painstaking research done by successful investors. FinPortfolio.com lets you incorporate a little of the human element with the computer's formidable forecasting ability. It's a nice combination.

ValuEngine.com

Cost: From free to $30 per month, depending on the service.

Like FinPortfolio.com, ValuEngine.com will suggest ways to tweak your portfolio allocations. The site also has a handy stock evaluation tool -- again, one that's based on a computer model. The tool tells you the odds that a particular stock will eventually double in price and gives you target prices for up to three years in the future. The stock evaluation tool makes this site worth a trip if you're looking for a second opinion on that flaky biotech issue.

But what I really appreciate about ValuEngine.com is its disclosure. It has created several model portfolios to back-test the modeling software, and the results are there for everyone to see. Some of the site's computer models have greatly outperformed the S&P 500 index over the long term. For example, $1 invested using the "balanced model" in 1985 would have grown to $275 today. However, $1 invested using the site's "daytrading" model would have underperformed the S&P 500 during the same timeframe.

In the shorter term, some of the results of ValuEngine.com's computer models appear less than spectacular. Checking the figures earlier this week, the computerized strategy based on investing in "quality low-risk stocks" was down more than 18% since last October. At the other extreme, the "value" investing model was up more than 23% for the same period.

OnMoney.com

Cost: Free.

Now if only FinPortfolio.com and ValuEngine.com and their competitors could go the extra mile -- that is, combine their forecasting models with things like bill-paying and online statements that track your bank accounts, variable annuities, life insurance and so forth. That would save people the trouble of re-keying all this information. Better still, it would be great if these sites could also create financial forecasts based on the entire spectrum of your holdings -- in other words, track your entire net worth day by day using modeling software that factors in stock market conditions, general economic conditions and maybe even local economic conditions, like real estate values.

Nothing like that exists right now. But OnMoney appears to be moving in this direction. OnMoney's financial forecasting tool already pulls data from other online accounts -- such as bank accounts and investment portfolios -- that you create at the site. You can also pay bills online. At this writing, H&R Block is working with the site to let you automatically pull data from your various OnMoney accounts to prepare an online tax return.

True enough, OnMoney's portfolio tracker and the financial planning tools don't appear as sophisticated as those at FinPortfolio.com and ValuEngine.com. But maybe that's the price you pay for one-stop shopping.