The Relationship Between Actual Investments and Planned Investments
- Large investors, including pension funds, outline asset allocation strategies that include current investments as well as planned, or target, allocations. The decision to set targets cab be due to a change in an investment strategy for which a new approach cannot be adopted overnight. For example, in 2011 the New Jersey State Investment Council prepared to allocate billions of dollars to hedge funds, according to the Hedge Fund Manager Week website. The investments were part of a planned allocation that could only become possible with state approval. The planned changes were an attempt to increase the size of the retirement fund.
- Sometimes actual and planned investments differ based on the liquidity of current assets. Real estate assets, for instance, are less liquid than more common investments such as equities. Subsequently, even if a percentage of an investment portfolio is currently dedicated to property, a planned asset allocation could devote more or less of total assets to real estate. The transition from current investments to planned allocations will require time to achieve.
- When performance in an investment portfolio is not adequate, it can inspire changes to planned allocations. Reasons for the under-performance may be tied to the investment securities or it can be due to changing economic conditions. For example, in 2011 U.S. monetary policy was set so interest rates were especially low, which translated into modest returns for many fixed income investments. Rates were expected to remain at low levels in the coming years, and subsequently investors were forced to regroup and plan on longer-term bonds for adequate yields, according to "The Wall Street Journal."
- Target date funds are mutual funds in which the asset allocation changes every five-to-10 years. These funds have planned investments that differ from the existing investments and are designed to reflect the changing needs of an investor who's saving for retirement. Typically, the investment composition of the fund becomes less risky within each segment of a series so an investor's assets are better protected from losses once retirement approaches.