I have seen many advisors cite a paper 'determinant of portfolio performance II' based on a 10 year study I think that asset allocation is 90% of variability in returns. Why do you feel asset allocation is very important to your portfolio? How did you learn this? Going back with their formulas do you have any data showing how asset allocation models would have performed over the past 100 years?
global.vanguard.com
Why are asset allocation models less effective in BEAR markets versus BULL? Again this is one country in a narrow time frame - will the asset allocation models stand up if you extend the time frame or change the country - say you were an english investor in the 19th or 20th century - would a paper that analyzed london stocks for 10 years have put you in the money with those troublesome ignorant colonists?
vanguard.com
So, it would seem fair to reaffirm our earlier amendment of the BHB conclusion: "Although investment strategy can result in significant returns, these are dwarfed by the return contribution from investment policy, and the total return is severely impacted by costs."
An even more extreme conclusion was reached by William W. Jahnke, like BHB a winner of the yearly Graham and Dodd Award for an outstanding article published by the Financial Analysts Journal. Writing in a recent issue of the Journal of Financial Planning, Jahnke concludes: "For many individual investors, cost is the most important determinant of portfolio performance, not asset allocation policy, market timing, or security selection."
forbes.com
False prophets
By David Dreman, 01.13.97
IN JANUARY of 1995, many market timers and asset allocators warned that the market looked toppy. The S&P 500 had run up 71% from its 1990 low, and close to 600% from the beginning of the great bull market. Toppy? The market proceeded to advance another 71%.
Market timers and asset allocators promise to get you in and out of the market at the right time. Asset allocators go one promise further. Working with a host of technical, fundamental and economic variables, they claim they can maximize your returns through the proper blend of stocks, bonds, cash and other investments.
If they could do what they claim to be able to do, the timers and allocators would make their followers rich. Who, after all, wouldn't have wanted to be out of the market in October of 1987 and back in early the following year? But in practice no one I repeat, no one can consistently call market turns with precision. ;
The chart, taken from Morningstar data, tells it all. It shows the returns of 186 asset allocators for the 11 years to last September, compared with the S&P 500 and the average of all domestic equity funds. The period covers a good part of the bull market, as well as the 1987 crash, the worst on record, and the sharp downturn of 1990. This was an ideal period for the market timers or asset allocators to prove their mettle. They should have gotten you out before the 1987 and 1990 crashes and back in on time to ride the resurgent bull. Had they succeeded, you would have outperformed the market handily.
As the chart shows, heroes they ain't. While the market surged 508% over the entire period and the average equity fund moved up 410%, the asset allocators increased only 296% (all figures are dividend adjusted).
With hundreds of market letter writers and asset allocators bandying forecasts about, some of them are bound to make good calls it's the law of the coin toss. But calling heads once does not seem to improve the chances of calling it right at the next toss. ;
Mistiming
Take the case of a well-known market timer whose claim to fame was that she called the 1987 crash, a claim somewhat disputed because she never issued it to her clients. As the market fell sharply in July 1996, this seer predicted it would drop another 1,000 points. Her revised forecast drove the Dow down 40 points the day it was issued. But her revised forecast notwithstanding, the Dow had moved up 1,129 points near the end of December.
Even when the timers and allocators make lucky calls at the top, there is almost no chance they will get you back in anywhere near the bottom. On paper their claims make sense. In the real world they don't.
Still, what do you do after the market's enormous gains? I wouldn't sell quality stocks, particularly if the gains are taxable. If you bought a stock at 10 and it is now at 50, you owe Uncle Sam $10 a share in capital gains taxes. So even if you could buy the stock back at 40, you still wouldn't be cash ahead. The way to make big money is to buy and hold quality stocks, not to try and outsmart the market.
Is there enough asset classes outside of US markets?
publish.uwo.ca
'Data from 91 large US pension plans indicate that investment policy dominates investment strategy (market timing and security selection), explaining on average 93.6% of the variation in total plan return .' Brinson et al. 1986.
Almost all the 'quotes' omit the important qualifier 'on average'.
Many omit the word 'variation', and claim that 93.6% of investment RETURNS come from asset allocation.
Others incorrectly interpret 'variation' to mean variation of return from plan to plan.
Most seriously, there has been a frequent misunderstanding of what the authors meant by 'investment policy' or 'asset allocation'. Brinson et al. defined investment policy to be a combination of the choice of asset classes and the choice of asset mix. Many think it is just asset mix that determines over 90% of your return. Later work showed that it is the first part of investment policy, the decision to invest in the various asset classes, that is responsible for the major part of return, represented by the return due to the market portfolio. An advisor or manager does not deserve any credit for this return.
The return due to investment strategy is defined as the return of the portfolio relative to a portfolio of index funds with fixed weights. Averaged over plans, this return will be close to zero. Brinson et al. unjustifiably declared that this return was therefore due to chance and did not contribute to overall return. That is the real meaning of their statement that the return due to investment policy is overwhelmingly dominant, in spite of the fact that, for some plans, strategy returns were large.
Important conclusions are
Asset mix choice is usually responsible for a minor part of portfolio return.
An investor who believes that asset allocation dominates portfolio return should invest in index funds and not try to time markets.
You have already lost the easy money in metals waiting on your asset allocator friends to clue you in.
Message 21038945
Deutsche Bank AG last year began encouraging some investors to include in their ASSET ALLOCATION decisions a 3% stake in commodities, including metals. Morgan Stanley's Individual Investor Group also recommends investors increase their short-term position in alternative investments, which includes, among others, metals and managed futures funds, in which a manager actively trades commodity and financial futures, including metals contracts.
In many cases, Wall Street's interest in metals is coming after the easy money already has been made. Metals prices have moved higher, and many metals-related stocks have soared recently. As copper prices essentially doubled during the past two years, shares of Phelps Dodge Corp., the Phoenix-based copper giant, have tripled.
Nickel in December averaged $6.30 a pound, up from $1.89 a pound in 1998. That's the highest price the metal has seen in 15 years. Silver is up about 40% for the past two years, and gold is up more than 50% since Sept. 11, 2001.
But some are betting that the bull market in metal prices isn't over. For one thing, China's growth continues to absorb vast amounts of the world's metal production, particularly steel, copper and aluminum.
Where is the diversification into those pesky asians economy? Proper asset allocation would dictate that to base your future on the success of one very indebted nation out of the world's 200 or so who is a net importer of large quantities of energy from countries that hate it and are religiously in opposition to it - is not spreading around the risk no? |
