AllianceBernstein found that 30% of all investors do not have an approach to asset allocation and rebalancing their portfolios, according to a news release on the survey. Around 40% of investors said they believe investment selection is equally or more important to performance than asset allocation, while 25% believe asset allocation is just an industry buzz word.
A companion poll of 567 investment advisors found that advisors believe the right asset allocation plan would have added 68% to a portfolio’s return over the past 30 years, according to the release. Eighty-three percent of advisors said the proper asset allocation plan could have cut investor losses by at least half during the market downturn in 2000 and 2001.
Investors believe they’re knowledgeable, however. Twenty-six percent of investors responding to the survey give themselves an “A” in understanding the concept of asset allocation, and 41% give themselves a “B.” Seventy-seven percent said they are comfortable with their ability to create a proper asset allocation plan.
In contrast, 46% of advisors in the companion poll said their clients are “not too knowledgeable” or “not at all knowledgeable” about the impact of asset allocation on portfolio performance.
Still, despite giving themselves high grades in knowledge, investors want to know more. Eighty percent of respondents said they would like to know more about portfolio diversification, compared to 39% who wanted to know more about exchange-traded or index funds. Forty-six percent said they would feel more comfortable with increased investment risk if they understood asset allocation better.
The survey also found that investors are lax when it comes to the important step of rebalancing in asset allocation. Twenty-nine percent said they typically don’t rebalance and 57% said they don’t rebalance as often as they should.
Certain investor behaviors contribute to investors’ reluctance to rebalance. Seventy-seven percent of advisors said it is hard to get investors to stick to an asset allocation plan when the markets are moving strongly up and down. The number one problem according to advisors (81%) is investors’ reluctance to sell winners and buy underperformers. Forty-eight percent of investors said their number one investment mistake was holding on to a losing investment too long. Sixty-one percent said it was harder to sell a winner than admit they’re wrong to a loved one.
Advisors say the other most common reasons investors disregard their advice are “lack of understanding of asset allocation” (65%), “satisfaction with the way their portfolio is performing” (63%), and “concern over taxes and capital gains” (62%). However, advisors feel somewhat responsible for the actions of investors. When asked how well they do in getting clients to stick with asset allocations in volatile markets, 55% of respondents graded advisors with a “C.”
The survey found, however, that investors benefit from the objectivity of a financial advisor. Fifty-six percent of investors with a financial advisor have a written financial plan, while only 26% of do-it-yourself investors do. Seventy-five percent of those with an advisor have an approach to allocating and rebalancing, compared to 61% of direct investors. More investors with advisors diversified their portfolios over the prior 12 months than direct investors (71% vs. 54%).
Another solution to maintaining asset allocation is the use of asset allocation or lifestyle funds that are automatically rebalanced. Of the 58% of survey respondents that said they were familiar with asset allocation funds, 61% of those with advisors and 46% of direct investors own one. Eighty-one percent of investors said they provide a buffer in down markets, 78% said they simplify investing, 73% disagree with the idea that asset allocation funds don’t perform well, and 60% these funds generate better performance than the investors could on their own.
The survey of 1,000 investors with a minimum of $75,000 in assets to be invested was conducted by telephone. Complete survey results and more information can be found at www.therightmix.com .