Asset Allocation - The default asset allocation preference

Q - How is the Asset Allocation panel (preference), found on the Preferences screen, used? 

- This preference is used as the initial default asset allocation for any account (investment, money purchase, drawdown pension) that is set to be grown stochastically using an asset allocation, rather than a fixed growth rate. 

The default Asset Allocation found on the Preferences screen, in Plan Preferences (right), simply sets the asset allocation that is shown initially on the Asset Allocation panels found on the InvestmentsMoney Purchase and Drawdown Pensions screens. 

If you set an account to be grown using asset allocation -- a check box option which is found on each screen's Growth panel as well as on the Asset Allocation panel, both under Advanced Settings -- then the default asset allocation, taken from Plan Preferences, will be used to derive a growth rate for the account using the software's market assumptions and based on the percentages allocated to the various assets in the asset allocation. 

Preferences provide system's initial defaults. However, if you enter or load an alternative asset allocation (model portfolio) on an Asset Allocation panel, at the investment-specific level in the plan, this alternative asset allocation will override the default allocation for that account. In general, growth rates, inflation rates, and other settings, when edited at the item-specific level in a plan, will override the initial Plan Preferences (defaults) and once edited, they stay edited at the item level. 

On another note, you can also modify the asset allocation for an investment at given points in time, if necessary, using the Step Up / Step Down panel, also found under Advanced Settings.

 

Using asset allocations to set account growth

An asset allocation refers to how an investment is split by underlying asset classes.  For example, we could define an investment as being made up of 70% UK Equity and 30% Fixed Interest.

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Asset allocations (and market assumptions behind them) are one of two options in the software for calculating the capital growth on investments.

 

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The other is using a simple fixed growth rate.

    

 

Unlike a fixed growth rate, asset allocations derive an average 50th percentile return, which the software uses as the investment's assumed rate of return, as well as an upside and downside range or return, each being two standard deviations from the 50th percentile. This range of return can also be equated to a level of risk.

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Because of the range of return an asset allocation provides that a fixed growth rate cannot, there are some features in the software require at least some investments to be grown using asset allocations if they are to be used. These features include the Asset Allocation Overview as well as the Monte Carlo and Historic simulations.