What is asset allocation?
To perform asset allocation for their clients, practitioners need two types of information.
- A client's financial profile. Clients with more risk-aversion and shorter time horizons need to hold safer, lower-return assets compared to clients with more risk-tolerance and longer time horizons.
- Risk and return projections for each asset class. Asset allocators use these estimates to choose the investments that will maximize a client's return given their risk budget. If the asset class risk and return estimates are wrong, clients could end up with poor returns or too much risk, jeopardizing their goals.
All asset allocators think carefully about the first question. Yet not all of them give the second its due.
Static allocators don't change with financial conditions.
Dynamic allocators adapt.
Assessing a client's financial profile and deciding how much risk they can take is largely a simple exercise that can be carried out by basic software. That's why some static allocators, like roboadvisors, can offer such low fees. But static allocators leave their clients subject to the whims of the market.
If your risk and return projections are wrong, your asset allocation decisions can be harmful to your wealth and leave your goals beyond reach. Will the coming decade be more like the '90s or the 2000s? Static allocators don't know.
At Bireme, we believe strongly in dynamic allocation. We project future returns via proprietary, backtested models. Using these projections, we can allocate based on the opportunity set available instead of trailing returns. We try to put our clients in the right assets at the right time, so they get the risk and and return they expect.
Reverse the behavioral return gap.
Instead, many people focus on short-term performance when making their investment decisions. They may look at trailing one-year or three-year performance figures, and invest in the asset class or fund that did best. Then the next year they do the same thing, hopping from one investment to the next.