Fibonacci Financial

Posts Tagged ‘Investments’

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.

The Primary purpose of this post is to demonstrate what kind of research supports the asset allocation decisions on the Market Decision Dashboard.

Doesn’t  Real Estate ALWAYS goes up in price.

Wrong! During most of our lifetimes that has appeared to be true because of the constant debasement of the dollar by the Federal Reserve with the approval of congress (primarily responsible), the senate, the president and the “sleeping on the job” supreme court. But the chart below tells the real story in constant dollars.

The following chart is a constant dollar price chart published by Robert Shiller. The average constant dollar price from 1946 to 1998 was 111. The index started at 100 in 1890 and after the recent bubble blow off has dropped back down to 145. But it is still headed down. Dr. Shiller has indicated that Real Estate still has a lot more downside potential – risk.

That is why Real Estate still has a Red Light on the Asset Allocation Model. There is a time and a season for every investment. I will let my clients know when it is safe to get back in to the Real Estate water.

PS:  The Shiller Constant Dollar Residential Home stats and the Case-Shiller Housing indexes are only part of what is monitored to maintain an accurate Map of Real Estate.  Every campaign requires an accurate map of the battlefield.  This is one of the key pieces to success in battle according to Sun Tzu in the Art of War.

If you want a call when Real Estate gets the Green Light, email me:

Michael@fibonaccifinancial.com

PPS: Yes, I know Real Estate is a “Local Phenomenon”. Local market conditions are discussed with clients

PPPS: If you found this valuable or interesting PLEASE let me know !

Michael@FibonacciFinancial.com