The Asset Allocation Hoax

Jahnke, William W.
August 2004
Journal of Financial Planning;Aug2004, Vol. 17 Issue 8, p64
Academic Journal
This article reprints the article, 'The Asset Allocation Hoax,' by William W. Jahnke, which appeared in the February 1997 issue of 'Journal of Financial Planning.' It is common practice in presentations to individual investors and 401(k) plan participants to show a pie chart demonstrating that asset allocation is the most important investment decision. The presentations generally show how historical combinations of stocks, bonds and cash have performed over various time periods. The presentation goes on to discusses mutual fund options offered to implement the asset allocation advice. The presumption by the investor or the plan participant is that once risk tolerance has been established, investing is simply a matter of implementing a fixed mix of stocks, bonds and cash using the mutual funds being offered. The industry standard for assessing the importance of asset allocation policy in determining portfolio performance is based upon the study, 'Determinants of Portfolio Performance,' by Brinson, Hood and Beebower. Asset allocation policy explains only a small fraction of the ten-year returns, but a large fraction of the variation of the short-term returns due to the effect of compounding returns. Persistent small increments to periodic returns compound over time, while the volatility in returns grows more slowly as the investment period is lengthened.


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