Here on Andes Risk, we have a feature that lets you monitor if the client accounts/portfolios remain aligned with desired risk and return objectives over time. To navigate to this page on Andes Risk, go to a Household and then select the "Asset Allocation" tab.
Asset allocation refers to the distribution of investments across different asset classes such as stocks, bonds, and cash equivalents. We've organized the asset classes into broader categories. For further details, please visit the Asset Allocation article.
Asset allocation drift occurs when the actual allocation of investments deviates from the target household asset allocation chosen. This drift can result from various factors including market fluctuations, changes in investment performance, and portfolio rebalancing activities.
The logic of account aggregation operates as follows:
1. Initially, we aggregate the client accounts.
2. If there are no client accounts, proceed to aggregate the prospect accounts.
3. If there are neither client nor prospect accounts, then aggregate the proposal accounts.
We have the Accounts table that displays all the accounts used for the Household Asset Allocation. This is also helpful for troubleshooting purposes.
Defining Allocation Drift Tolerance Thresholds
Here's a brief overview of the thresholds:
Within Tolerance Drift: When drift is within tolerance, it means that the allocation of resources or parameters is slightly deviating from the expected or baseline values, but it's still within acceptable limits. Within tolerance drift often occurs due to minor fluctuations in system conditions or workload demands.
Warning Drift: Warning drift occurs when the deviation in allocation surpasses predefined thresholds, indicating a potential problem or performance degradation on the horizon.
Out of Tolerance Drift: Out of tolerance drift represents a significant deviation from expected allocation levels.
Monitoring asset allocation drift is essential for maintaining portfolio integrity and achieving long-term investment goals. By tracking the actual versus target allocation levels, investors can identify deviations early and take appropriate actions to realign their portfolios. Failure to address asset allocation drift may lead to unintended exposure to risk or suboptimal investment performance over time.