What is Adaptive Asset Allocation? Why is it central to the 3 primary factors– Return, Risk, Cost -- that will most determine what the Plans value will be at Retirement?
It is not a 'market timing' approach, i.e., it does not try to anticipate or predict the tops and bottoms of market trends - no one can do that. Horizon's™ AAA automatically protects you from the three unnecessary and unacceptable risks certain to occur with FAA.
Asset Allocation (AA) distributes the Plans investments so that at all times there is a certain portion invested in equities, fixed income and/or cash. The theory is that this distributes risk. If equities are going down (a bear market) then it is likely that fixed income will be going up. If equities are going up (a bull market) then it is likely that fixed income will be going down. By having $ in both when one goes down the other goes up thus offsetting loss and controlling risk.
Formulaic Asset Allocation (FAA) the basis behind Life Cycle Funds and Managed Account Funds and goes one step further. The theory is that equities are a more risky investment than fixed income (and certainly cash) and that as one gets older they should automatically have a smaller % of their $ invested in equities and a larger % invested in fixed income. For Life Cycle Funds The FAA % is set by age level. Typically 80% in equities, 20% in fixed income at age 25 rebalanced 1% each year so that at age 65 there is 40% in equities and 60% in fixed income.
Managed Account Funds set FAA % according to peoples answers to risk tolerance questions (aggressive, moderate, and conservative). Typically the % levels are: aggressive -- 80% equities/20% fixed income, moderate -- 60% equities/40% fixed income, conservative -- 40% equities/60% fixed income.
Adaptive Asset Allocation™ (AAA) the basis behind Horizon, holds a different view. The logic is that there is great risk to keeping $ automatically invested in an asset class that will surely produce mounting losses i.e. in equities when there is a major downtrend (Bear Market), or in fixed income during a major uptrend (Bull Market which --if done -- will severely restrict recovery values.
Under Bear Market conditions AAA holds that there should be 0% in equities and 100% in fixed income and/or cash. In a Bull Market there should be 100% in equities and 0% in fixed income. In sideways markets there should be a certain % in both equities and fixed income.
To automatically keep a constant % in equities and fixed income ignoring market and economic conditions -- as FAA requires -- causes two major high level risks that are unnecessary and – in Horizon's view – unacceptable. They are 1) Maximum loss of Retirement Plan value in a Bear Market 2) Minimum rebuilding and growth of Retirement Plan Value when the market recovers (Bull market).
Over time FAA is highly unlikely to come anywhere near producing needed Retirement Plan Values. This exposes the Participant to the highest risk of all -- not having enough $ to cover their retirement needs. And FAA causes these inadequate results to occur at a very high cost. Typically 15% of Plan value by Retirement. (For a comparison of performance and cost of Horizon AAA vs. Life Cycle FAA click on the following link) Kevin we must put the link here I have some tables already done that need a bit of help form you to finalize)
Tom Pate Chart #4 AAA/Life Cycle Funds FAA Performance/Cost Comparisons and Chart 3.]