Standard asset allocation models are wrong: Dalbar


Growth Assets vs Preservation Assets

In his report, Dalbar distinguishes between growth assets, which are stocks, and conservation or protection assets, which include treasury bills, notes and bonds; corporate bonds, money markets, CDs and annuities.

Prudent Asset Allocation uses protection assets, which are more predictable than growth assets, to meet investors’ cash flow needs while allowing growth assets to appreciate at their maximum rate.

Since 1928, Treasuries, Dalbar’s “most apt to preserve” asset, have not lost money in any given year, and their median one-year gains have been 3 %. Over the same period, the S&P composite posted a median one-year return of 14.2%, while the Nasdaq posted a median return of 15.4%. The two stock indices are the “least suitable” assets for preservation, but the “most suitable” assets for growth, according to Dalbar.

Dalbar’s prudent asset allocation combines the concepts of preservation and growth, using investor income and preservation assets to fund current and large expenditures with the least amount of risk, and equities to maximize asset growth over a longer period.

If an investor suffers stock losses in the second year of the five-year period, for example, or needs more funds due to a change in circumstances, he will have the money to get by without having to sell shares, giving their stock allocation time to recover. They can also replenish preservation assets with their growth assets if this allocation works now.

Strategy doesn’t “need rebalancing [because] the allocation is based on the funds actually needed by the investor,” according to Dalbar.

“You don’t know what’s going to happen next year, but you’re not going to use everything that’s budgeted for the next five years,” Harvey said of the Prudent Asset Allocation model. He added that it can also alert investors before they run out of money, providing an opportunity to cut spending.

Pictured: Louis Harvey, CEO and President of Dalbar


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