Fibonacci Financial

Repeat 20 Times – 90% of Portfolio Performance Comes From:

Asset Allocation!

“Dramatic support for the importance of asset allocation is provided by a study of 91 large pension plans covering the period 1974 through 1983. 1  The study sought to attribute the variation in total returns among the plans to three factors: asset allocation policy, market timing, and security selection.  The study dramatically supports the notion that asset selection policy is the primary determinant of investment performance , with market timing and security selection both playing a minor role.  The study was subsequently updated with additional data and once again arrived at the same conclusion.2  The pie chart shows the results: asset allocation policy explained 91.5 % of the variation in total return among the pension plans.  The selection and market timing factors, by contrast, explained only 4.6% and 1.8% of the variation, respectively.” 

Excerpted from: Asset Allocation, Balancing Financial Risk, Second Edition, Forward by Sir John Templeton and written by Roger C. Gibson, pages 12 and 13.

If you haven’t read the recent blog entry titled Avoid the “Life-Cycle Investing” Trap! please do so now.

Footnotes:

1. Gary P. Brinson, L Randolph Hood, and Gilbert L. Beebower, “Determinants of Portfolio Performance,” Financial Analysts Journal, July-August 1986, pp. 39-44.

2.  Gary P. Brinson, Brian D. Singer, and Gilbert L. Beebower,
“Determinants of Portfolio Performance II: An Update,” Financial Analysts Journal, May-June 1991, pp. 40-48.

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