Do passive asset allocation promoters misrepresent its strength?
"Determinations of Portfolio Performance” by Brinson, Hood, and Beebower is one of the most widely misquoted academic papers of all time. Many passive asset allocators use parts of the paper to misquote what the paper actually determined. To be sure, here are some comments from the papers authors written about the misrepresentations:
Do you think your paper has been misinterpreted or its findings abused? For example, L. Randolph Hood, one of your co-authors, recently wrote that the widely quoted 93.6% number that the study attributes to the policy, or asset allocation decisions is, "often misquoted or taken out of context."
I think that's right. People will take anything and sometimes misinterpret or misuse it for their own purposes. And that's too bad. To some extent, individuals make claims about the article that aren't factually correct, and I suppose that's undesirable. On the other hand, anything that gets people focused on the issue of asset allocation is desirable.
Is there any particular misinterpretation or misuse that you find especially annoying?
There's one quote that I see periodically. Let's say a portfolio had a return of, say, 10 percent, and someone will say, "93.6% of that return is due to asset allocation." That's not true. That's not what the paper said; that's not the application of the paper. First of all, it didn't apply to an individual portfolio; it applied on average to the portfolios we were examining. The number is an average number, not a number that applies to every single portfolio.
Source: March 2006 issue Wealth Manager web
To learn more about the asset allocation hoax, read The Asset Allocation Hoax by William W Jahnke (1997)
