T. Rowe Price Active Portfolios — A Breakdown
T. Rowe Price(R) has recently introduced ActivePlus Portfolios — an investment advisory program that attempts to match a TRP portfolio with your time horizon and risk tolerance.
To get started, you fill out a brief online questionnaire and TRP then recommends one of ten portfolios. In this article, we describe the ten portfolios, provide a mapping from the questionnaire to the recommended portfolio, and provide the components of each portfolio.
Disclaimers: There may be errors in this article and I am not responsible for any gain or loss you may incur as a consequence. I own a T. Rowe Price personal account.
- 10 different model portfolios on offer. The portfolios are named Retirement 10 through Retirement 100. Each portfolio pulls from among 13 TRP mutual funds.
- The questionnaire determines your risk tolerance and time horizon and picks one of the ten portfolios.
- Each portfolio is a combination of stocks (both US and international) and fixed income. See the table below.
- The portfolio number is approximately equal to the percentage allocated to stocks. For example, Retirement 80 allocates approximately 80% to stocks and 20% to fixed income.
- Stocks are heavily weighted towards large cap US stocks.
- Fixed income is heavily weighted towards US Investment Grade.
The questionnaire matches one portfolio from the available ten portfolios based on the answers you provide.
The questionnaire starts with your age, the amount you wish to invest and the account type (rollover, Roth or traditional IRA). These are qualifiers and have no bearing on the portfolio that is allocated to you.
Then, the questionnaire first determines if you want to take either
- a time horizon approach (“yes, I plan to spend the money in the account”), or
- a risk tolerance approach.
There are two main questions:
- I need this money in __ years (based on retirement age).
- I will need this money to last __ years (based on life expectancy).
There are two additional questions.
The first question is about risk tolerance— “how did you react when an investment lost value?” This question is also common to the risk-tolerance based approach (see below). There are four choices: (a) high risk tolerance i.e. buy more if your investment loses value, (b) medium i.e. hold, (c) low i.e. sell, or (d) not sure.
The second question is about tolerance to short-term fluctuations. This question is also common to the risk-tolerance approach (see below). There are four choices: (a) increase the upside potential, (b) no change, (c) reduce downside risk, or (d) significantly reduce downside risk.
The recommended portfolio is a combination of your time horizon — how soon you need to start spending the money — and your risk tolerance. If you don’t need the money in 35 years and have high risk tolerance, you may get recommended the Retirement 100 portfolio. Whereas, if you need the money in less than 10 years and are also highly risk tolerant, you may get recommended the Retirement 70 portfolio.
It is much easier to map the purely risk-tolerance based approach to the portfolio as described below.
If you take the risk tolerance approach, the next questions are in the following order:
- Risk and reward potential (3 choices) — growth, moderate growth or reducing short-term fluctuations.
- Risk tolerance (4 choices)— high (buy more if your investment loses value), medium (hold), low (sell), or not sure.
- Tolerance to short-term fluctuations (4 choices) — high (increase the upside potential), medium (no change), low (reduce downside risk), or very low (significantly reduce downside risk).
Consequently, there are 48 combinations of risk tolerance profiles mapped to the 10 available portfolios. For example, if you choose potential for growth, have a medium risk tolerance and a medium tolerance for short-term fluctuations, you would get recommended the Retirement 90 portfolio.
The mapping is shown below. The first column indicates that you have answered “no” to the question “Do you plan to spend the money in this account?” i.e. you have chosen a risk tolerance approach. The subsequent columns correspond to answers to the four subsequent questions.
Stocks and Bonds
Your portfolio could include both US and Global equity. Choices for equity are selected from the following:
- Large-Cap (largest equity component; present in all portfolios)
- Developed Markets
- Developing Markets
- Inflation-Sensitive Equity
Fixed income components are selected from the following:
- US Investment Grade (largest fixed income component; present in all portfolios)
- Developing Markets Bond
- Developed Markets Bond
- Corporate Credit
- Conservative Fixed Income
- Cash (only the Retirement 10 portfolio has this)
The composition of the ten portfolios (as of 2017.03.26) is shown below:
Comparison to Target Date Funds
- Allocations in target date funds adjust over time — in general moving from stocks to bonds. Allocations in active portfolios do not change with time — they change when you change your risk tolerance or time horizon.
- With target date funds, you do not own the underlying fund — you own the target date fund and the target date fund owns the underlying funds. With active portfolios, you have a direct position in the underlying fund.
We have provided the mapping of the risk tolerance as determined by the TRP questionnaire to the recommended model portfolio. We have shown the composition of each of the model portfolios. We hope that this gives you a broad picture of not only how the portfolios are mapped to your answers, but also the composition of the portfolios themselves.