Remember the Brinson, Hood,Beebower study? The study concluded that asset allocation is responsible for over 90% of the variance in portfolio returns, actually here is the breakdown, 91.5% asset allocation, 4.6% security selection, 1.8% market timing, and 2.1% other factors. A new white paper by Roger Ibbotson created an argument that the BH&B study may not be all it’s cracked up to be(remember 2008 market?) In a nutshell Ibbotson says that 70% of return variation can be explained by market movement and the remaining 30% is, on average divided between active management and asset allocation. So, 70% is total market volatility, or positive or negative movement of asset classes, i.e. 2008 negative movement of the financial sector taking with it other asset classes to provide a negative return in 2008. Remember the experts saying, “asset allocation didn’t work in 2008″ Therefore, the amount of market exposure an investor is willing to take may be the most significant piece of the puzzle that determines the performance of the portfolio, wow, makes sense to me!!!(hey, how did managed futures perform in 2008???)
So, what can an investor do to to assist in potentially benefiting from increased market exposure while adopting an approach designed to help cushion a portfolio from market declines???