The Right Way to View Asset Allocation

Abstract

One myth that came about in the late ‘80s and early ‘90s is that asset allocation is responsible for 90% of your return. The study used to “prove” this did not say so nor did its authors. This was a misunderstanding of the work and was pushed by index fund sellers and asset allocation study providers. Among the flaws of the study: many of the universities in the study used the same managers, and when the managers in an asset class were of different names their correlation and R² were close. Asset classes were similar. About the only axis on which there could be difference was asset allocation, and it wasn’t much.