Limitations of Asset Allocation Tools
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Limitations of Asset Allocation Tools
While online tools certainly make asset allocation decisions easier, they have their limitations.
Things To Know
- Every tool uses a different set of assumptions.
For example, if you use six different online asset allocation tools, you’re likely to get six different recommendations for what your asset mix ought to be. Why? Because every tool uses a different set of assumptions.
Inflation and earnings assumptions
For example, different tools use different inflation rates, and some will even allow you to choose your own rate. Different assumptions lead to different results. Online asset allocation tools must also make assumptions about what various asset classes will return in the future.
Taxes
Further, most online asset-allocation tools don’t take taxes into account. That’s because each investor’s tax situation is different. But in the real world of investing, taxes are a huge issue. Realize that the final portfolio values you get from these various tools are generally pretax.
Despite these limitations, sampling an array of online asset-allocation tools, as well as seeing what asset mixes target-date funds employ for people with your same target date, is a good way to get your asset allocation in the right ballpark.
