Volume 13, Issue 2
9
Portfolio Size Matters Gordon Irlam, Independent Software Developer, Los Altos, California
In contrast to target date funds that vary asset allocation by age alone, it is important to take into account both the client’s age and the client’s portfolio size relative to spending goals when determining an optimal asset allocation. Stochastic Dynamic Programming (SDP) is a mathematical optimization technique that can be used to determine optimal dynamic adjustments to asset allocation in response to evolving portfolio wealth and time horizons. Using SDP, portfolio size appears at least as important to asset allocation decisions as age. For a 25 year old, asset allocation using SDP requires approximately 20-34% less resources than traditional target date asset allocation approaches. Financial planners can provide much value to their clients by incorporating portfolio size into a dynamic asset allocation strategy.