The Importance of Asset Allocation
Independent studies have proven that asset allocation overwhelmingly determines the risk and return behavior of any investment portfolio.4 Its not what an investor buys, its what an investor buys in relation to the other things they buy in their portfolio that matters.
Unfortunately, the asset allocation process receives far less attention as compared to the massive amounts of time and money spent on evaluating individual securities, sectors and geographical regions in the futile attempt to accurately predict where securities, and the markets in general, will go in the future.
A recent study by Vanguard found asset allocation explained, on average, 88% of a portfolio’s short-term return variability and more than 100% of a portfolio’s long-term level of return.5 These findings suggest security selection and market timing were meaningful detractors to a managed portfolio’s long-term performance.
At Seabridge Wealth Management, LLC, we fully embrace the importance of establishing, and maintaining, a properly diversified and prudently asset allocated portfolio.
This is because that is precisely what decades of objective and independent data – compiled by the world’s leading academics, statisticians and Nobel Laureates – tells us we should do.
4 Brinson, Gary P., L. Randolph Hood, and Gilbert L. Beebower. 1986. “Determinants of Portfolio Performance.” Financial Analysts Journal, vol. 42, no. 4 (July/August): 39-48. Brinson, Gary P., Brian D. Singer, and Gilbert L. Beebower. 1991. “Determinants of Portfolio Performance II: An Update.” Financial Analysts Journal, vol. 47, no. 3 (May/June): 40–48. Ibbotson, Roger G., and Paul D. Kaplan. 2000. “Does Asset Allocation Policy Explain 40, 90, or 100 Percent of Performance?” Financial Analysts Journal, vol. 56, no. 1 (January/February): 26–33.
5 Wallick, Daniel W., Julieann Shanahan, Christos Tasopoulos, and Joanne Yoon. 2012. “The Global Case for Strategic Asset Allocation.” (July). The Vanguard Group.