Dynamic Optimization for Goals-Based Wealth Management with Multiple Goals

44 Pages Posted: 14 Oct 2019

See all articles by Daniel N Ostrov

Daniel N Ostrov

Santa Clara University

Sanjiv Ranjan Das

Santa Clara University - Leavey School of Business

Deep Srivastav

Franklin Templeton Investments

Anand Radhakrishnan

Franklin Templeton Investments

Date Written: October 1, 2019

Abstract

We develop a dynamic programming methodology that seeks to maximize investor outcomes over multiple, potentially competing goals (such as upgrading a home, paying college tuition, or maintaining an income stream in retirement), even when financial resources are limited. Unlike Monte Carlo approaches currently in wide use in the wealth management industry, our approach uses investor preferences to dynamically make the optimal determination for fulfilling or not fulfilling each goal and for selecting the investor’s investment portfolio. This can be computed quickly, even for numerous investor goals spread over different or concurrent time periods, where each goal may allow for partial fulfillment or be all-or-nothing. The probabilities of attaining each (full or partial) goal under the optimal scenario are also computed, so the investor can ensure the algorithm accurately reflects their preference for the relative importance of each of their goals. These portfolio prescriptions are consistent with Prospect Theory.

Keywords: goals-based wealth management, multiple goals, dynamic programming, optimal portfolio

JEL Classification: C61, G11

Suggested Citation

Ostrov, Daniel N and Das, Sanjiv Ranjan and Srivastav, Deep and Radhakrishnan, Anand, Dynamic Optimization for Goals-Based Wealth Management with Multiple Goals (October 1, 2019). Available at SSRN: https://ssrn.com/abstract=3462795 or http://dx.doi.org/10.2139/ssrn.3462795

Daniel N Ostrov (Contact Author)

Santa Clara University ( email )

500 El Camino Real
Santa Clara, CA 95053
United States
4085544551 (Phone)
4085544551 (Fax)

Sanjiv Ranjan Das

Santa Clara University - Leavey School of Business ( email )

Department of Finance
316M Lucas Hall
Santa Clara, CA 95053
United States

HOME PAGE: http://algo.scu.edu/~sanjivdas/

Deep Srivastav

Franklin Templeton Investments ( email )

Multi Asset Strategies
P.O. Box 997152
San Mateo, CA 95899-7152
United States

Anand Radhakrishnan

Franklin Templeton Investments ( email )

Multi Asset Strategies
P.O. Box 997152
San Mateo, CA 95899-7152
United States

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