Role of allocation from Ibbotson

Advisor Perspectives:

"Another way to understand the contributors to return variance, Ibbotson said, is to consider a four-step process that looks like this: You begin by assuming you start with cash, then you go to an average asset mix, and then you go to the specific policy mix for a particular fund. Finally, you put in active management, which consists of actively managing your asset allocation plus actively managing your stock and bond selection, security selection, and of course paying some fees.

“Just going from cash to that average asset mix explains approximately 70% of the variation of returns,” Ibbotson said, although in the BHB study it was a little more than that. When you go to the next piece, which is the policy piece, it explains another 15% or so. The last piece, active management, explains the remaining 15% in the variation of returns."

HT to Derek Hernquist