How a Variety of Asset-Allocation Plans Work
Unless you’ve been trapped inside Biosphere II lately, you’ve probably heard about asset allocation.
This isn’t a particularly new investment idea, but it’s gaining in popularity. Several mutual fund companies are now offering asset-allocation plans or services that tell shareholders where to put their money.
Not to be confused with asset-allocation mutual funds--which offer the same mix of stock, bond and cash holdings for all shareholders--the programs offer personalized help for people who don’t know which types of funds to buy, and in what proportions.
The theory behind asset allocation is to get the big picture right. Allocators worry about finding the optimal mix of asset categories--stocks, bonds, cash and various sub-groupings--and care less about individual securities.
The reason is simple. “Academic studies indicate that asset allocation accounts for more than 80% of long-term investment returns,” says David J. Kudish, president of Stratford Advisory Group in Chicago. In other words, just 20% or so of overall performance is explained by individual stock or bond selection.
Because mutual funds follow their respective asset categories closely, they fit nicely into allocation strategies. The allocation programs and services offered by fund companies often come with various twists and features. Here are three examples:
* Dreyfus’ Investment Allocation Service. This is among the simplest programs. All you do is fill out a one-page questionnaire that asks about your risk tolerance, years until retirement, return expectations, income, current assets and more. Dreyfus then will analyze your situation, superimpose on that its current outlook for the stock, bond and money markets, and send you a five-page allocation report about 10 days later. Each report includes a recommended mixture of mutual funds, but it’s up to you to implement the strategy. Some plans may feature as few as three funds.
Does all this spell an overly simple allocation? Richard B. Hoey, Dreyfus’ chief economist, thinks not. “There’s enough complexity in this program to get people in the right direction,” he says. “You don’t necessarily have to spend $10,000 to get a better asset mix.”
One advantage of the Investment Allocation Service is that it’s free. Also, you won’t be bothered by a broker, although you will probably wind up on the company’s mailing list. The Dreyfus service debuted in 1989 and was enhanced last year. About 100,000 people have participated since its inception. You can obtain a questionnaire by calling 800-782-6620 or by visiting Dreyfus Financial Centers in Los Angeles or Beverly Hills.
* Shearson Lehman Bros.’ Strategic Asset Allocator. This is a much more complex, computerized system that lets you develop a customized plan on the spot. With the help of a Shearson broker, you input information on your financial history and objectives. The program suggests an asset mix based on Shearson’s current investment strategy. This intricate service has the potential to churn out 540,000 portfolio combinations.
The review generally takes one to two hours and results in a report four to nine pages long that is prepared while you sit in the broker’s office. Strategic Asset Allocator will generally recommend mutual funds, assuming you have less than $50,000 to invest in a particular category. “In reality, anything less is not a lot of money to achieve proper diversification,” says Shelley Freeman, Shearson’s director of financial planning.
This service also is free, although you may be urged to buy the load funds Shearson sells. About 1,000 investors a week are opting to have a personalized plan drawn up, Freeman says. If interested, contact your local Shearson office.
* Fidelity’s Personal Advisory Service. Under this program, anyone with at least $100,000 to invest can get a custom portfolio of eight to 12 Fidelity funds. Bob Beckwitt, Fidelity’s chief investment strategist, determines each person’s asset mix. Investors also are assigned a local account executive to answer questions and handle problems. In general, Beckwitt adjusts portfolios four to six times a year.
In the past, Fidelity charged nothing for this service aside from the 2% or 3% loads it levies on many of its equity funds. But starting Sept. 1, investors will pay a flat 1% a year for the allocation service, and all applicable loads will be waived.
This program, in effect since 1989, has attracted $300 million in assets. Investors can call 800-544-0114 for details.
These three services hardly exhaust the mutual fund strategies available for individuals based on asset-allocation principles.
Kudish’s company, for example, is one of several independent advisory firms that draw up and oversee fund portfolios for a fee. Many brokers and financial planners also will help you build a portfolio of funds using asset-allocation principles.
Regardless of which allocation avenue you choose, you will come to learn more about yourself and your investments. An important byproduct of the planning process is education.
Even the simplest services ask questions intended to help you pinpoint your financial expectations, risk tolerance and other factors.
For an allocation plan to work effectively, you should stick with it through several market cycles. But that’s not likely to happen unless you understand what you own, and why.
Realistic Returns
Looking for a 15% return on a risk-free investment? Don’t get your hopes too high. There’s only so much you can hope to earn based on your risk tolerances and the long-term performance of stocks, bonds and other types of assets. Time is also a factor. The figures below show what Shearson’s Strategic Asset Allocator program viewed as realistic returns for conservative, moderate and aggressive investors about a year ago--before interest rates began their long slide--and now. The allocations assume that a person maintains at least some holdings in each of the three main asset categories--stocks, bonds and cash.
Risk Level Year Ago Now Conservative: Up to 9% Up to 7.5% Moderate: 9.1% to 13% 7.6% to 12% Aggressive: 13.1% to 15% 12.1% to 14%
