Investing can be a complex process, and one of the most important decisions investors have to make is how to allocate their assets. Asset allocation refers to the process of dividing investments among different asset classes to meet a specific investment goal while managing risk.
Background
Asset allocation decisions are influenced by a multitude of factors, including an investor's risk tolerance, investment goals, market conditions, and personal circumstances. However, a recent survey conducted by (Choi, Robertson 2020) aimed to understand the factors that drive investors' asset allocation decisions.
Survey Methodology
The survey focused on the factors that determine the proportion of an individual's wealth that is invested in equities. The survey asked participants about the value of their investable financial assets and what percentage of those assets were invested in stocks, either directly or through mutual funds.
Factors Influencing Asset Allocation
The survey grouped the factors into six categories: background risks and assets, social and personal factors, expected return beliefs, factors from neoclassical asset pricing models, nonstandard preferences, and miscellaneous factors.
Background Risks and Assets
Background risks and assets refer to risks and assets outside the stock market that affect allocations to equity. The survey found that the risk of illness or injury and labor income risk are particularly important to investors.
Social and Personal Factors
Social and personal factors include religion, low trust in market participants, lack of a trustworthy advisor, lack of knowledge about how to invest, personal experience investing in the stock market, and financial phobia. The survey found that low trust in market participants, financial phobia, lack of knowledge about how to invest, and lack of a trustworthy advisor are significant factors influencing investment choices.
Expected Return Beliefs
Expected return beliefs refer to investors' beliefs about the future performance of different asset classes. The survey found that the expected return on stocks was an important factor in determining an individual's allocation of wealth to equities.
Factors from Neoclassical Asset Pricing Models
Factors from neoclassical asset pricing models, such as the capital asset pricing model and the Fama-French model, are also important in asset allocation decisions.
Nonstandard Preferences
Nonstandard preferences, such as external habit, loss aversion, and prospect theory, are also important in asset allocation decisions. These preferences reflect behavioral biases that can affect investors' decision-making processes.
Miscellaneous Factors
The survey found that factors such as stock market returns before the respondent's birth, advice from peers and the media, and rules of thumb were not significant factors in determining an individual's allocation of wealth to equities.
Conclusion
The survey results suggest that investors should consider a variety of factors when making asset allocation decisions. Investors must take into account background risks and assets, social and personal factors, expected return beliefs, factors from neoclassical asset pricing models, nonstandard preferences, and miscellaneous factors. No single factor dominates equity share decisions, and there is variation in ratings across all categories. Investors must also consider their investment horizon, risk tolerance, and market conditions when making asset allocation decisions. By taking into account all of these factors, investors can make informed decisions that align with their investment goals and risk tolerance.
This article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decisions.