August 24, 2023

Fact or Fiction? 90% of Portfolio Performance is Down to Asset Allocation

By George Cliff

The goal of asset allocation is to create a well-balanced portfolio that aligns with an investor’s financial goals, risk tolerance, and time horizon by spreading investment among different asset classes like stocks, bonds, cash, and real estate. It is widely accepted to be one of the most influential contributors to the overall performance of investment portfolios.

 The idea that asset allocation is responsible for 90% of a portfolio’s performance is a commonly quoted statement in the world of investing and taken as absolute fact by many. However, this claim is often taken out of context and oversimplified.

Where did the statistic come from?

This is based on a landmark study conducted by Gary P. Brinson, Randolph Hood, and Gilbert L. Beebower that was published in the Financial Analyst Journal in 1986. The study, ‘Determinants of Portfolio Performance’, analysed the performance of different pension funds and attributed the variation in their returns to three factors:

  1. Asset allocation
  2. Market timing
  3. Security selection

The research showed that asset allocation explained approximately 90% of the differences in portfolio returns among the funds analysed. However, it’s crucial to understand the limitations of this study and the context in which the statement was made:

  • Historical data – The study was based on historical data from pension funds and may not have fully represented the overall performance of individual portfolios – it could not include the ongoing performance of those portfolios which continued after the research was carried out.

  • Long-term perspective – The study emphasised the importance of taking a long-term perspective when evaluating portfolio performance. Short-term fluctuations in returns due to market timing or security selection were found to have minimal significance compared to the long-term impact of asset allocation decisions.

  • Individual circumstances – Financial goals, risk tolerance, and investment time horizons are unique for every investor. Asset allocation should be tailored to an individual’s specific circumstances and objectives.

  • Market timing and security selection – According to the study’s findings, asset allocation accounted for the largest portion of the variation in returns, followed by market timing (the ability to buy and sell assets at advantageous times) and security selection (choosing individual securities within an asset class) on portfolio performance. Surprisingly, these two factors had a relatively small impact on overall portfolio returns compared to asset allocation.

  • Other contributing factors – While asset allocation is essential in building a successful investment portfolio, other factors like fees, taxes, and the impact of economic events also influence portfolio performance over time.


What were the implications for investors from the study, ‘Determinants of Portfolio Performance’?

The study’s findings had profound implications for investors and portfolio managers. It highlighted the significance of strategic asset allocation in designing portfolios for various financial goals and risk tolerances.

The concept of diversification across different asset classes gained significant validation from this study and those that followed it.

 Portfolio management strategies

The study reinforced the idea that constructing a well-diversified portfolio which is aligned with the investor’s objectives is more critical to long-term success than trying to time the market or select individual securities for short-term gains.

The role of financial advisers

The study underscored the importance of financial advisers and professional portfolio managers in guiding investors through the asset allocation process. By helping clients determine suitable asset allocations based on their financial goals and risk profiles, advisers can add significant value to investment outcomes.

Academic and industry impact

The “Determinants of Portfolio Performance” study has been widely cited and referenced in academic research, and it has influenced the development of modern portfolio theory and asset allocation practices across the entire investment industry, worldwide.

It’s important to note though that while the study provided valuable insights into portfolio management, the investment landscape has evolved significantly since 1986. Market conditions, regulations, and the availability of investment options have changed considerably.

Fact or fiction?

So, is the 90% statement entirely true? Given the age and limitations of the study, this figure should not be taken as an absolute rule or an exact predictor of investment performance. There are multiple factors which determine the performance of an investment portfolio, and all are important.

Nevertheless, the study’s core message on the significance of asset allocation and its impact on portfolio performance remains highly relevant in today’s investment world. It determined that asset allocation is indeed a critical factor in a portfolio’s ongoing performance.

Meet the Author

George Cliff

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