Business

Goal-Oriented Investing

Goal-Oriented Investing by Seth J. Masters, AllianceBernstein

How should investors assess the asset-allocation decisions they or their advisors make? In our view, the key benchmark is the investor’s own goals.

The Display below assesses the success of three plausible asset allocations for meeting the risk and return goals of three different hypothetical investors. Investor A wanted annualized returns greater than 5%, with no peak-to-trough drawdown deeper than 20%. Investor B targeted annualized returns greater than 7%, with no drawdown deeper than 30%. Investor C cared only about achieving a return greater than 7%, with no drawdown constraint at all.

Goal-Oriented Investing

The display shows the share of all rolling 10-year periods from January 1976 to June 2015 in which each investor would have achieved his goals through each of three different mixes of global stocks and municipal bonds.

The conservative (30% stock/70% bond) allocation would have most often achieved Investor A’s conservative goals, with his lower return objective and tighter drawdown limit. The moderate and growth-oriented portfolios, by contrast, would have repeatedly exceeded his drawdown constraint.

The moderate (60/40) portfolio would have most often met Investor B’s goals. And the growth-oriented (80/20) portfolio would have had the greatest success rate in meeting Investor C’s goals. When risk isn’t an issue, stocks are the asset of choice.

This display underscores the importance of matching a portfolio’s asset allocation to the investor’s return and risk objectives. Investors who don’t select an asset allocation that fits their objectives are likely to be disappointed.

Of course, this illustration covers only simple return and drawdown goals. In most real-world situations, investors also need to take into account their expected cash flows, their tax situation, prevailing market conditions, and a host of other factors. And real-world investors can choose between more than two asset classes.

But no matter how complex the objectives an investor seeks, or how diverse his or her asset allocation, we think one simple standard should apply: The asset allocation has to be designed around the investor’s objectives. If not, the investor is unlikely to be satisfied with the plan and unlikely to stick with it.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams.

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