Monday, 3 February 2014

The asset allocation difference between professional investors and ordinary investors

Pension & Investments shows us what happens to asset allocation choices , reproduced below, when professional investors manage Defined Benefit pension plans versus ordinary investors doing it in Defined Contribution plans in the latest update for the largest US-based plans.
It's a dramatic difference:
  • though the total allocation to stocks is pretty much the same, ordinary investors in DC plans have a much heavier weighting in domestic stocks - the potential for international diversification is much under-exploited
  • pure fixed income seems to be much neglected by ordinary investors; instead there are huge dollops in DC plans of something odd and undefined (that I could find at least) called Stable value and the synthetic Target date funds.
  • professional investors in DB plans take advantage of Private equity and Alternative investments, which ordinary investors cannot do easily, if at all
  • the DC plans of ordinary investors have large piles of un-productive, idle cash, which the pros don't
  • real estate is absent from DC plans of ordinary investors, again a missed diversification opportunity
This sure looks like an example of the oft-stated idea that ordinary investors don't do as good a job as the professionals. However, it's not inevitable. Ultra-simple basic portfolios of broad market funds, requiring only annual rebalancing maintenance, that give a pretty good result are easy to specify (e.g. Simple Portfolios or a Canadian version of famous pro investor David Swenson's model on my other blog HowToInvestOnline). Most ordinary people I suspect just don't pay any attention and don't bother to learn even the most basic principles of investing. It seems odd when so much is at stake.

1 comment:

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