Holistic Asset Allocation for Private Individuals

Abstract

Unlike the typical institutional investor, private investors are faced with multiple locations for assets and multiple goals for the use of funds. This makes the asset allocation decision much more complex and, in part, drives the demand for using holistic approaches in developing an investment strategy. In particular, the single period efficient frontier optimization that is commonly used may be an inadequate tool in determining the “optimal” asset allocation for the private investor. Relying upon the standard efficient frontier methodology may lead to a suboptimal solution in which separate asset allocations are created for each of the different locations to fund specific assigned goals. A better approach could be to develop a single unified asset allocation model that simultaneously considers different asset locations and funding goals. The authors propose a framework and an optimization technique that solves for a unified asset allocation taking into account a private investors multiple asset locations and multiple goals.

TOPICS: Wealth management, portfolio construction, performance measurement