Adaptive Asset Allocation™ (AAA) vs.
Formulaic Asset Allocation (FAA)
Horizon™ Adaptive Asset Allocation™ (AAA) is the highest return and lowest risk Asset Allocation approach because your Plan's investment allocations will trend so as to be positioned to work with -- rather than fight against -- the changing tide of market and economic realities.
To understand the difference, you must first understand how all traditional, Formulaic Asset Allocation (FAA) methods (Life Cycle and Target Date funds, Managed Accounts, models based on questionnaires, etc.) work.
Formulaic Asset Allocation (FAA)
Every FAA approach requires that you keep a significant and fixed percentage of your Plan value (40%-80%) invested in stocks at all times—regardless of what the market is doing. For example, during the recent severe down market (1/2000 - 3/2003) a FAA strategy would have forced you to hold and lose money in stock funds for the entire 3-year period. This is the single most important reason as to why virtually no one can grow their Retirement Plan to their needed values following a FAA approach.
And when the market began to recover, a FAA approach would required you to continue to hold a large percentage (20% - 60%) of your money in bonds so that, while the market was moving up, you were forced to hold and lose money in bond funds, greatly reducing your gains.
You can think of a FAA approach as a repeating cycle of "1½ steps forward—1 step back" which leads to:
- Maximum loss of your Retirement Plan value in down markets;
- A ruinous impact if you retire during a down market (i.e., the ‘Time of Retirement Risk’); and
- Severely limited growth of your Retirement Plan value during up markets.
These three consequences guarantee that you will not reach your 401(k) plan Retirement Goal following a FAA approach. Note: Even a young person just starting their career must plan to work at least 60+ more years AND need to be fortunate enough to retire during the peak of an up market to even come close to reaching their 401(k) plan Retirement Goal following a FAA approach .
Adaptive Asset Allocation™ (AAA)
The Horizon™ Adaptive Asset Allocation™ (AAA) model, on the other hand, automatically reflects and adjusts Plan holdings according to what the market is doing using a consistently applied, objective process. At the end of an up market, as a true market top begins to unfold and become obvious to all, the Horizon™ model automatically begins to shift money out of stock funds (which will now be going down) and moves into bond funds (which will now be going up), thereby protecting your Plan against sustained loss.
Similarly, at the bottom of a down market, the reverse happens. As a true market recovery unfolds and becomes obvious, the Horizon™ model automatically begins to shift a larger percentage of money into stock funds (which will be going up) and out of bond funds (which will be going down). There may come a point when the Horizon™ model has moved all the money in the Plan into stocks, thereby maximizing your gain opportunity.
Therefore, the way in which Horizon™ produces exceptional Plan value over time is by greatly expanding Plan value during up markets and then protecting this greater Plan value by limiting loss during down markets. And when the next up market starts, you start building from a much higher Plan value base. This cycle of “expand-protect” is then repeated over and over again. You can think of Horizon™ as a repeating cycle of "3 steps forward—1 step back".
Horizon™ protects you from a financial crisis if you retire in a severe down market by:
- Increasing your Plan's Average Annual Return (AAR) with low risk, and
- Avoiding the ‘Time of Retirement’ risk by preserving the majority of your Plan's value during a severe down market.
As a result, you will have significantly more money in your Plan at the bottom of any severe down market than you would with any other approach--typically 2 to 3 times more. Note: People not retiring in a down market have the powerful advantage of growing their Plan in the subsequent up market from a much higher base.
HorizonTM Performance Results
The Compass Investors HorizonTM approach:
- represents 5 years of rigorous testing;
- contains over 500,000 formulas;
- is based on analysis of over 8,000 public and private funds;
- has been tested over diverse market conditions, economic conditions and timeframes; and
- identifies the "best positioned funds" (i.e., those most likely to increase over the next 1-3 months) as opposed to recent "best performing funds."
The Horizon™ AAA Strategy when applied to a Retirement Plan has out-performed by over 100% on average:
- Barron’s Most Prominent Financial Institutions’ Model Portfolios
- Value Line’s best 5-year portfolios
- Fidelity and Vanguard best balanced (Asset Allocation) funds for the past 5 years
- The very best of the Most Advocated Asset Allocation approaches used by Financial experts.
Compass Investors and Compass Institute