Strategic asset allocation is an important driver of a portfolio’s volatility over time. Vanguard has updated some research to discover what the latest numbers are.
One of Vanguard's four principles for investing success states that investors give themselves the best chance of success if they develop a suitable asset allocation using broadly diversified funds. This principle is built on the fact that strategic asset allocation is the most important driver of a portfolio's volatility and an important driver of its returns.
So where's the proof?
The idea first gained prominence in 1986 when researchers Gary Brinson, Randolph Hood and Gilbert Beebower (henceforth BHB) published their seminal paper Determinants of Portfolio Performance. Subsequent research by William Jahnke took a different stance, arguing that investors cared more about the terminal value of their investments than they did about variations along the way. Jahnke's 1997 paper, The Asset Allocation Hoax, suggested that BHB's conclusions failed to recognise the impact that fund selection has on terminal values.
Our research suggests that both BHB and Jahnke can be right. It suggests that initial asset allocation is the most important driver of return variations during the holding period, but that fund selection can also significantly affect full-period returns.
Read the research summary here.
The Vanguard Group established the first index fund in the US in 1976 and today manages £1.7 trillion in assets worldwide.*
Vanguard established a UK presence in 2009 and offers UK investors a range of low-cost passive funds and five LifeStrategy single-fund solutions.
*Data correct as at 31/03/2014. Vanguard Investments UK, Limited is authorised and regulated in the UK by the Financial Conduct Authority.