“The time has come for folklore to be replaced with reality” says Roger Ibbotson in “The Importance of Asset Allocation” in CFA Institute’s Financial Analysts Journal (March/April).
Folklore means “the idea that asset allocation policy explains more than 90 percent of performance,” which is a misinterpretation of the classic 1986 article, “Determinants of Portfolio Performance” by Gary Brinson, Randolph Hood, and Gilbert Beebower, says Ibbotson.
“Asset allocation is very important, but nowhere near the 90 percent of the variation in return is caused by the specific asset allocation mix,” writes Ibbotson. Rather, active management plays a role equal to that of asset allocation, as shown by “The Equal Importance of Asset Allocation and Active Management,” an article co-authored by Ibbotson with James Xiong, Thomas Idzorek, and Peng Chen in the same issue of the Financial Analysts Journal.
Receive a free 32-page e-book with client communications tips when you sign up for my free monthly newsletter.