Did Asset Allocation Work?

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When you're constantly exposed to daily jumps and plunges in the markets, it makes it all the more difficult to stay focused on the long term. To escape the daily distraction of market movements, many have turned to asset allocation funds for one-stop shopping.

Yet, because these funds gained popularity during the middle of the last bull market, many of them hadn't gone through an extended period of declines. Now that these funds have gone through one of the worst years in stock market history, it's fair to ask: Did they protect investors from the stock market's drop?

Different kinds
You'll find a variety of different types of asset allocation funds. Some funds maintain set allocations between stocks, bonds, cash, and other investments, so you'll always know how much of your money is invested where.

Other funds have greater flexibility to adjust allocations among different asset classes according to market conditions. For instance, the Vanguard Asset Allocation Fund compares itself against a benchmark mix of 65% S&P 500 stocks and 35% long-term Treasury bonds. But the fund can invest in any mix of stocks, bonds, and cash -- and it chose to go to 100% stocks for much of the past year, thereby taking the full brunt of the market's drop during 2008.

Still other asset allocation funds use a set strategy to adjust their allocations over time. Commonly known as target funds, these funds are typically geared toward a particular date on which an investor plans to retire or use invested money for other purposes. You'll find these funds from a variety of providers, including Vanguard, Fidelity, and T. Rowe Price (Nasdaq: TROW  ) . As time passes and the target date approaches, the asset manager typically makes the portfolio more conservative, reflecting the shorter time horizon over which investors can afford to take risk.

Did they get the job done?
You'd expect that asset allocation funds would have performed fairly well in a down market, especially since any exposure to bonds should have helped pull returns up substantially. Nevertheless, although most funds didn't drop as much as the overall stock market, they still turned in a pretty depressing performance:


YTD Return

Current Allocation (Stocks/Bonds/Cash)

Vanguard Asset Allocation (VAAPX)



Fidelity Asset Manager 70% (FASGX)



AIG Retirement I Asset Allocation (VCAAX)



Delaware Moderate Allocation I (DFFIX)



Mainstay Moderate Allocation I (MMRIX)



Vanguard Target Retirement 2030 (VTHRX)



Source: Morningstar. Data through Nov. 24. Allocations may not add to 100% due to rounding or assets in other categories.

Overall, Morningstar's moderate allocation category, where most asset allocation funds appear, came in with an average loss of 32.7% year to date.

Looking at each fund's investment portfolio, the differences in performance appear to come more from the different allocations that fund managers chose than from particular choices of stocks. You'll see mostly well-known stocks in their portfolios -- for instance, Vanguard's funds have their largest holdings in mega-cap companies like ExxonMobil (NYSE: XOM  ) , General Electric (NYSE: GE  ) , and Procter & Gamble (NYSE: PG  ) .

Many of the funds in the list above use a fund-of-funds approach, investing in other mutual funds within the same family. Mainstay's asset allocation fund, for example, did well with its investment in an inflation-indexed bond fund -- but the shares of Mainstay ICAP Select Equity (ICSLX) that it bought have lost over 40% so far this year, with investments in Viacom (NYSE: VIA-B  ) , News Corp. (NYSE: NWS  ) , and Goldman Sachs (NYSE: GS  ) leading the way down.

Looking at the long haul
The worst news comes from looking at these funds over the longer haul. For those funds that have a longer track record, most have done worse than the Dow Jones Moderate Portfolio Index. In other words, you'd be better off putting together your own portfolio of index funds than using an asset allocation fund.

Investors have to be discouraged with the way asset allocation funds have in many cases failed to deliver on promises. After all, investors were willing to give up some huge gains during bull markets for downside protection, so the current bear market should be payback time. Unfortunately, many funds haven't been able to capitalize on the added flexibility they have -- at least not for now.

For more on making the most of your investments, read about:

To learn more about evaluating mutual funds, take a look at our Motley Fool Champion Funds newsletter. With monthly fund picks, analysis, and more, why not do it today? It's completely free with a 30-day trial.

Fool contributor Dan Caplinger does his own asset allocations. He owns shares of General Electric. Try any of our Foolish newsletters today, free for 30 days. The Fool's disclosure policy always works for you.

Read/Post Comments (2) | Recommend This Article (7)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 25, 2008, at 12:27 PM, crhein wrote:

    They seemed to beat the market by 10% or more, which is at least commendable. Losing a third of their value is no peach, but compared to an straight stock index fund, these funds are outperforming. Even Berkshire Hathaway is down about those levels this year.

    Performance should be measured on a longer timeframe. How have these funds done against market benchmarks over the past 5 years? That seems more relevant to a long term investor (ie, someone who would be investing in these funds). Though it may make a less shocking, electrifying or even interesting article, it would be more informative to an intelligent investor.

  • Report this Comment On November 25, 2008, at 6:28 PM, GoNuke wrote:

    All theories with respect to stock market performance are irrelevant when the global financial system collapses. If any of these managers were really good at their jobs they would have been keeping track of systemic risk. Systemic risk trumps portfolio risk any day. It now behooves investors to ignore the bond rating agencies and decouple their ratings from debt instrument pricing. Bonds became just as risky as stocks so one had to have put as much effort into picking bonds as one did picking stock. The asset allocation model collapses under such circumstances.

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