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Asset Allocations are often highly generalized

Most investment guidance is limited to very basic concepts.
For example, an investment advisor provides a static portfolio mix and suggests markets people may invest in.

But most investments have a specific purpose: Save towards a house, education expenses, retirement or preserve wealth for the next generation. The asset allocation in the portfolio should be closely linked to the purpose!

Our mission is to enable explicit linkage to investment goals.

Investment Goal : Saving for Retirement

The purpose of this kind of investment (Pension Plan, SIPP, etc.) is very clearly defined.
Saving for retirement is covering a liability to yourself. It also maybe the most important liability you can have!
There are two main challenges associated with matching this purpose.

Challenge 1: Living expenses grow with inflation

The standard ways to invest for retirement do not account for the fact that living expenses are growing (at least) with the rate of inflation. Usually, Pension Funds and asset managers talk about their nominal returns. While they may even invest in inflation linked bonds these investments do only generate returns in excess of inflation under specific circumstances.

Measuring every return against realised inflation can improve the visibility of assets performance against this goal.

Challenge 2: Future returns are hard to predict

No one can predict the future and future returns of assets. As a result most pension saving strategies rely on a simple or completely static asset allocation. Contrary to that, it is intuitive that asset allocation should take the current, relative price of assets into account.

While some asset classes do not have an inherent return (commodities, FX, etc.) some do and as a result should be more or less reflected in an asset allocation.

For example, bonds with negative yield-to-maturity (YTM) are very unlikely to outperform inflation. Therefore they should only make a small percentage of the portfolio.

Placeholder graph for return prediction challenge

How to address these?

Investments will always have the risk of decreasing in value and we will never be able to predict the future. What can be done is to assess the historical relationships between assets and their current "expected" return and volatility. Based on this historical analysis, or assumptions the user chooses to make about these factors, asset allocations for retirement investment can be generated. allocatewise has developed tools which take the development of living expenses and relative asset prices into account in the asset allocation they generate.

allocatewise is not regulated by the Financial Conduct Authority and access to historical analysis, usage of asset allocations generated with the tools offered or any research or opinion provided is not financial advice. If you are unclear about any aspect represented here please engage with a certified independent financial advisor.

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