 Personal Finance PowerPoint Presentation Asset Allocation Fund Prepare to get financially fit by practicing personal finance Support Accounting Instruction by clicking the link below giving you a free month membership to all of the content on our website broken out by category, further broken out by course each course then organized in a logical, reasonable fashion making it much more easy to find what you need than can be done on a YouTube page. We also include added resources such as Excel practice problems, PDF files and more like QuickBooks backup files when applicable. So once again click the link below for a free month membership to our website and all the content on it. Most of this information comes from a Vestopedia Asset Allocation Fund which you can find online. Take a look at the references, resources, continue your research from there this by Adam Hayes update of July 27, 2021. And prior presentations we've been taking a look at investment goals, strategies, tools keeping in mind the two major categories of investments that being the fixed income, typically bonds, equities, typically the common stock also thinking about tools we might be using such as mutual funds, ETS possibly allowing us to diversify with less of an initial investment than if we invest in individual stocks or the individual bonds. Keeping that in mind we're now asking what is an asset allocation fund? An asset allocation fund is a fund that provides investors with a diversified portfolio of investments across various asset classes. So when we're doing our investing as an individual investor we're often thinking about investing for retirement for example and we then could use the strategy of investing in individual stocks, individual bonds hard to diversify doing that however. So then we might say well why don't I use an IRA, a Mutual Fund or an ETF which is going to allow us possibly to pool our resources with other investors under the fund so that the fund manager can then invest in multiple investors investments helping us to diversify. Now when we think about like an IRA or a 401K plan for example these often are going to be thinking like I would think of them as in essence an umbrella basically over the tool of the Mutual Fund so you don't want to think about them like different completely typically they have different tax components related to them but they're using the same underlying thing, the same underlying tool typically a Mutual Fund that is now under the umbrella of some type of retirement account like an IRA or 401K plan allowing you to get some kind of tax benefits from that. So keeping that in mind then the next question is well how am I going to choose my Mutual Funds? I can have, I could try to get one Mutual Fund for example that is broadly diversified over a whole bunch of different stuff and then say just that would be a simple way to go just invest in that one Mutual Fund or I can use multiple Mutual Funds for example that are going to be more specific in that way possibly allowing me to be a little bit more specific in terms of my weightings what percentages I want in certain sectors for example. So here we're talking about an asset allocation fund. An asset allocation fund is a fund that provides investors with a diversified portfolio that being the key term of course of investments across various asset classes. So the asset allocation of the fund can be fixed or variable among a mix of asset classes meaning it may be held to fixed percentages of asset classes or allowed to go overweight on some depending on market conditions. So now you're going to think well how are they going to do that allocation within the fund they're going to have to find some way if they're investing in multiple different things how are they going to do the weighting so they could have a little bit of deviation in terms of how they're going to weight the investments. Popular asset categories for asset allocation funds include stocks, bonds and cash equivalents that may also be spread out geographically for certain additional diversification. So when we're investing typically the main categories we're saying I got stocks I got bonds those are the two big ones that we might be investing in in order to diversify we might then have separate mutual funds for stocks and bonds we might try to have one fund covering the stocks and the bonds. Now obviously those two are big categories so we could get more detail in those categories as well to think about well what kind of stocks are we investing in and different classifications by size and sector and then we could have different classifications for the bonds like government bonds, state bonds, other government bonds we've got the corporate bonds and so on. So having a widely diversified portfolio can be good but again they're going to have to find some way to lock in all the percentage allocations or how much will be allocated to different areas. So understanding an asset allocation fund. Asset allocation funds were developed from modern portfolio theory. Modern portfolio theory shows that investors can achieve optimal returns by investing in a diversified portfolio of investments included in an efficient frontier. So the idea there being if you got this optimal investment strategy then you could basically automatically basically invest in this diversified wide range of portfolio and get optimal returns which would be great because then you could basically put your money into a fund that does that according to modern portfolio theory and that would be pretty easy to do. That's pretty easy investment strategy. So the standard application of modern portfolio theory investing include an efficient frontier of stocks, bonds and cash equivalent. Furthermore modern portfolio theory outlines how a portfolio can vary its asset mix to tailor to the risk tolerance of the investor. So typically when we're thinking about putting money into an account our mutual fund we're taking into consideration the time horizon often times saving for retirement how long do we have until retirement then we can think about the optimal mix using our theory here modern portfolio theory for that time horizon and then we can also modify it based on the risk tolerance level meaning do you like to be in more risky or risk less assets and again I don't really like that term risk tolerance because it kind of makes you sound like that if you know the people that tolerate risk are strong and the people that don't calorie are weak and I'm not sure that's exactly the way it should be framed but you could take that into consideration as well those will typically be the questions asked if you're trying to pick say a portfolio for like an IRA or a 401k for your work or something like that so types of asset allocation funds provide a simplified application of modern portfolio theory with varying allocations and combinations of assets for investors one of the most common types of asset allocations funds is the balanced fund a balanced fund implies balanced allocation of equities and fixed income such as 60 stock and 40 bonds there's the standard 60-40 that we're trying to allocate now you're putting money in to this fund other people are putting money into the fund they're allocating the funds over a wide range of things two main categories stocks and bonds and they've got the 60-40 breakout that they're looking to line up the fund too so investors will find numerous funds deploying the good old 60-40 mix as it has become a popular standardized strategy for investors seeking broad market diversification asset allocation funds also offer varying levels of diversification based on risk tolerance investors seeking additional investing categories beyond just 60-40 will find many options including conservative allocation funds moderate allocation funds and aggressive allocation funds lifecycle and target date funds usually used in retirement planning are also considered a type of asset allocation fund these funds are managed with a targeted mix of asset classes that start out with a higher risk return position and gradually become less risky as the fund nears its targeted utility date so once again this would be common if you're investing in like a retirement type of plan for example using one of these basic mutual funds underlying it possibly looking for a target in terms of when retirement will be as you get closer to retirement your time horizon, the time you have to save and accumulate your fund gets shorter as you have a shorter time horizon then generally you would think you would want to be leaning towards less risky type of investments at that point in time and you can even pick a fund that takes that into consideration obviously these funds are going to be somewhat stringent in terms of what the rules are once the fund is set up because it's going to use whatever it thinks according to its theory of the asset allocation but you can use this nice diversification in one fund and then you can use a satellite approach they call it sometimes by then having other funds that you might try to put some money into from time to time if you think you should be more heavily weighted for example if you think a certain sector is going to do good for whatever reason you can open up another fund which would be specific to that sector possibly which would shift your weight from like a 60-40 to whatever you're investing in that other fund is like a side kind of thing so this would be your underlying fund you would think as your baseline fund and then if you want to tinker with your weighting in one area or the other like a certain sector or industry or particular stock for example then you might have additional investments that you can put in there based on your whims of the market so after determining a targeted asset allocation funds can manage their investment selection in a number of ways some funds may choose to invest in a variety of exchange traded funds those would be the ETS to represent different market exposure other funds may take a more active approach by using fundamental analysis to select top performing securities in each asset class overall most funds will actively monitor and allocate or rebalance securities in response to evolving market conditions and economic environments popular asset allocation funds below are examples of some of the investment industries top asset allocation funds you got the i-share core aggressive allocation ETF the AOA the i-share core aggressive allocation ETF is a tracker fund that seeks to replicate the performance of the S&P target risk aggressive index the fund invests in targeted ETFs that seeks to replace the index so it's an index you know it's tied to the index the index is heavily weighted towards equities targeting investors with a high risk tolerance you got the i-share core conservative allocation ETF as the AOK name so the i-share core conservative allocation ETF is a tracker fund that seeks to replace the performance of the S&P target risk conservative index so it's tied to the index once again which could limit the costs that you have related to the management of the fund so the fund invests in ETFs that seek to replace the index the index is heavily weighted towards fixed income targeted investors with a more conservative risk tolerance the vanguard balance index the VBIAX investors seeking asset allocation funds will find a number of options with vanguard vanguard's got a bunch of these kind of funds the firm's vanguard balance index fund invests approximately 60% in stocks and 40% in bonds it's holding seek to track two indexes which the CRSP US total market index and the Bloomberg US aggregate float adjusted bond index