How asset allocation strategies are determined and updated

Updating your asset allocation strategy periodically is just as important as rebalancing your portfolio.

Creating and maintaining a diversified portfolio

When constructing a professionally managed portfolio, TIAA takes into account your long-term goals and is mindful of the risks you are willing to take. But how do we establish and maintain your asset allocation strategy in a way that helps ensure your portfolio risk remains in line with your investment objectives and goals, as well as the evolving financial markets?
It starts with Capital Market Assumptions
Capital Market Assumptions (CMAs) represent estimates of the risk and return of each asset class, as well as how the asset classes perform relative to each other. Comparisons are composed of a wide range of assets that include equities (ex: large-cap stocks), fixed income (ex: short-term bonds) and alternative assets (ex: managed futures). TIAA’s Investment Management Group incorporates CMAs into formulating asset allocation to reach a desired balance between risk and return. We also use CMAs to project the range of possible
outcomes an asset allocation may produce over the next 10, 20 or 20+ years—so how the CMAs are determined is critical. TIAA’s CMAs are based on both historical data and a forwardlooking economic view.

Periodically, this information is used to evaluate your current asset allocation strategy and adjust it accordingly to maintain a properly diversified portfolio. Since asset allocations are one of the most significant drivers of variability in portfolio performance, think of CMAs as essential building blocks that help determine which asset classes are included in your portfolio.
The role of Capital Market Assumptions


Used for determining appropriate allocation to reap the benefits of diversification


Help determine expected returns, risk and asset class relationships


Asset allocation recommendations are based on a level of confidence
Are these assumptions viewed similarly throughout the industry?
Capital Market Assumptions can vary among financial services firms, and how each firm develops and uses them can vary too. The use of different CMAs can result in markedly different asset allocation for a given risk level, as well as different values used in growth projections.
In the example below, the equity exposure for “moderate” risk portfolios recommended by five different financial services companies varies widely as compared to TIAA. Based on our CMAs, IMG presently believes a moderate portfolio should have approximately 60% in stocks, while some other firms recommend upwards of 75% and others as low as 42%.
This irregularity in asset allocation recommendations also helps to explain why performance may vary between “moderate” or other similarly labeled portfolios at competing firms. At TIAA, we implement an asset allocation strategy that we believe will help you pursue financial well-being, and carefully weighs the balance between risk and return.
In the example provided, a “moderate” investor under TIAA Managed Accounts (with stock exposure of 60%) may be less impacted by a market downturn as compared to Company B, which has greater participation in the equities market (75%). This would also mirror an investment philosophy intended to help mitigate portfolio risks. However, if we were to experience a continued, strong bull market, higher returns may be witnessed by a “moderate” investor under Company B because of the higher equity participation in the stock market at a greater risk.
TIAA Investment Management Group (IMG)* consistently identifies, assesses and monitors both the source of any risk potentially impacting an investment as well as the potential returns associated with that risk. Doing so, is a part of IMG’s ongoing investment management process.
How often should I expect asset allocation updates to occur?
At TIAA, you can expect to see your TIAA Managed Accounts evaluated at least annually; if updates are necessary, adjustments will most likely occur at the beginning of the year.
This may or may not be the case with similar managed accounts. Depending on the type of program, an asset allocation strategy may be implemented only at the time an account is opened. If left alone, an asset allocation could drift away from a desired investment objective.
Although the process of rebalancing a portfolio can help maintain established allocation targets and manage risks in the portfolio, the long-term expectations regarding the behavior of various asset classes may drive potential updates to the asset allocation targets themselves. Considerations to update the targets may include: Significant price movements, fundamental changes in the market environment or when specific asset classes are identified as an opportunity to improve diversification.
Investment Management Group (IMG)* consistently identifies, assesses and monitors both the source of any risk potentially impacting an investment as well as the potential returns associated with that risk. Doing so, is a part of IMG’s ongoing investment management process.
*IMG offers investment management under TIAA, FSB.
Rebalancing does not protect against loss or guarantee that an investor’s goals will be met.
Diversification is a technique to help reduce risk. It is not guaranteed to protect against loss.
Investment products are not insured by the FDIC; are not deposits or other obligations of TIAA, FSB; are not guaranteed by TIAA, FSB; and are subject to investment risks, including possible loss of principal invested. The information provided here is for informational purposes only. It does not constitute an offer or recommendation to buy or sell any security. The views expressed may change in response to changing economic and market conditions. Past performance is not indicative of future returns.
TIAA, FSB, provides investment management and trust services. Advisory services provided by Advice & Planning Services, a division of TIAA-CREF Individual & Institutional Services, LLC, a registered investment adviser.

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