Vivek Haldar

Citation Reliability

If you spend enough time reading personal finance literature, you are bound to run into the claim that “asset allocation determines 95% of the return of a portfolio.” I did too. Then I began digging into it. Turns out that it is a widely held misconception.

The original study on which the claim is based claims a relation between assset allocation and volatility, not returns.

This paper1 clarifies:

The specific claims vary, but financial professionals generally assert that asset allocation is the most important determinant of returns, accounting for more than 90 percent of performance. This assertion stems from studies by Brinson et al. (1986, 1991), that state, “…investment policy dominates investment strategy (market timing and security selection), explaining on average 93.6 percent of the variation in total plan return.” This conclusion has caused a great deal of confusion in both the academic and financial communities. In fact, a survey by Nuttall & Nuttall (1998) demonstrates that out of 50 writers who quoted Brinson, only one quoted him correctly. Approximately 37 writers misinterpreted Brinson’s work as an answer to the question, “What percent of total return is explained by asset allocation policy?” and five writers misconstrued the Brinson conclusion as an answer to the question, “What is the impact of choosing one asset allocation over another?”

(emphasis mine)

The depressing lesson to be learned from this (and countless other times I’ve dug into the primary source behind a citation) is that citations of technical material in popular literature simply cannot be trusted. If you really want to know, go find the paper and read it. Citations of technical material in technical literature fare better, but even there results are often mis-interpreted or cherry-picked to suit one’s position.

As they say, use the force, read the source.

(So how much of returns are due to asset allocation? This paper2 might answer that question.)