Today I’m writing about Prudential’s Asset Allocation tool, and how it amazed me.
If you don’t know what an asset allocation quiz is, it’s a tool that financial intuitions created to provide advice on how to invest. These tools are often designed as a series of short questions about your investment horizon, risk tolerance and investment goals. Based on how you answer the questions, the tool will tell you how you should allocate your investments.
Up until now, I always considered these tools to be worthless. I know a fair amount about investing, and the results I got from these were always too conservative.
I’ve taken a number of these quizzes over the last 15 years. No matter what the quiz, I never agreed with the results. In fact, I used to take them just to see how bad the advice was.
My Investment Profile
When it comes to my retirement savings, I’m a knowledgeable investor with a very long time horizon. I want a lot of risk for the potential of a lot of reward, and I don’t care if I lose money for a few years.
For example, I viewed the 2008 financial crisis as a great buying opportunity. I’m in the market for the long haul, so a financial crisis is not when I sell investments. Instead it’s a great time to buy stocks that are on sale.
I used to think my problem with investment tools was that my appetite for risk is too high. After all, I enjoy risk.
Even with a very high tolerance for risk, I found that investment tools would always tell me to allocate 80% of my portfolio to equities and 20% to bonds. This is something I would never do. I’ve never owned a fixed income product in my life, and I don’t plan to start any time soon.
This leads me to Prudential Retirement’s online tool.
Testing 2 Online Retirement Tools
When I was researching this blog post a couple of weeks ago, it was going to be completely different. The topic was going to be about how diversification was overrated.
As a part of that post, I was going to use a few of these online tools as examples of the poor investment advice which advocates over diversification.
That was until I took a couple of these quizzes. What I found that was that these allocation tools have finally been adjusted for people with my risk profile.
I took two short investment allocation quizzes online. One with Vanguard, who is the largest asset manager for retail investors, and the other with Prudential Retirement.
Both quizzes correctly identified me as an aggressive investor, which did not surprise me. What I found surprising was that both tools recommended I invest 100% in equities.
Finally! My retirement savings have been 100% equities since I opened by first IRA when I was 18 years-old. Now these tools are telling me 20 years later that I’ve had the right investment strategy all along.
But that’s not all. These tools also recommended how I should allocate my equity investments. They’ll say X% in this type of fund and Y% in that type.
I found Vanguard’s recommendations to be okay, but not great. Prudential’s recommendations were amazing.
Prudential’s Asset Allocation Recommendation
Prudential’s 11 question quiz nailed my normal allocation strategy. I couldn’t believe the results. I immediately compared it to the asset allocation across my retirement accounts, and it was almost dead on.
Prudential recommended that I have 36% of my portfolio in international equities. I had 36.8% in this asset class. PRU also recommended that I allocated 26% to small and mid-cap stocks. I was at 12.5% for each. The remaining funds were allocated to large-cap domestic stocks in both PRU’s results and my portfolio.
It taken me about 20 years of thinking and tweaking to come up with this asset allocation. Prudential’s tool mirrored it in minutes.
It you have questions on how to allocate your portfolio, I would recommend checking out Prudential’s tool.
This simple online tool nailed my asset allocation strategy so well that I think others can benefit from it too. Check it out.