Does Your Financial Adviser Or Robo-Adviser Answer One Of The Most Important Questions For You?

5 simple questions, maybe 6 – punch in your age, your current investable assets, annual investable income, the investment horizon, your risk appetite, that’s it. Out comes your ideal asset allocation.

60% in domestic stocks, 30% bonds, and 10% in cash.

Many robo-advisers suggest different flavors of these questions, and a broader variety of assets, small/large cap compositions, foreign stocks, real estate, commodities. The point is the same. Ultimately, press the “Transfer funds and invest” button – now!

With the Dow Jones having just crossed 25,000 and the S&P 500 at a near high, why aren’t you ready to move? What’s the pause? What’s the problem?

A key assumption, perhaps the most important for your portfolio allocation is the expected return for the asset classes you’re making a decision on – the stocks, bonds, others. Not what the returns were in the past, but the expectation going forward

So why not include that for you as a user? We’ve looked at many leading robo-advisers and portfolio tools online. Few, if any, focus on this key assumption. In fact, that could be a useful question to ask advisers. Not the overall expected return – but the expectation from each of the asset classes recommended. We created a simple link here to illustrate that point

In fact, perhaps you know all about the fact that the stock market is at an all time high, and maybe there is a real chance that the next 10 or 15 years might see a lower performance, what if the average return is 7% instead of 10 or 12% over the next decade?

Right there, in the recommendation for the asset allocation are embedded assumptions for the return expectation for each of these asset classes – the stocks and bonds.

This is the expected return. For each asset class. Expected to be realized in the future.

“Future” is the problem. Decades of historical data doesn’t mean the next 10 years  is known. Future is uncertain!

And the problem is, you know that. You know that well. Too well.

So you freeze.

One solution is to enter your own view of the return expectation for stocks and bonds. The system automatically re-computes the optimal allocation and expected value of your portfolio.

Not happy? You can also adjust the allocation for the asset classes, and see the possible high and low ending values for a $10K invested in your adjusted portfolio.

This ability to change key assumptions, to check the range of possibilities, so you can confirm that the broader conclusion still holds, or revise it, makes a difference.

You might have more excuses for keeping that uninvested, excess cash in the savings account, but this should move you a step closer.

Something more interesting

However, there is something more interesting to this debate

It’s about clarity. It’s about simplicity.

About specificity – what you know for sure. More importantly, what you know to be uncertain, but can quantify.

Transform that general feeling of discomfort and uncertainty to an objective high and a low number!

This three step process (1) Identify the cause of inaction – commonly some uncertainty in outcome (2) Quantify it (3) Build a new expectation, can perhaps be helpful to unlock action beyond instances of a family’s asset allocation, to resource allocation within larger organizations and teams