Market Movement Trumps Asset Allocation

Market, Management or Asset Allocation

Much as we advocate asset allocation here at ITA Wealth Management, it is difficult to argue with the latest Ibbotson research that demonstrates the importance of market movement when it comes to portfolio performance.  This should not come as a surprise as we have all seen our investments rise and fall as if they are highly correlated with Mr. Market.

A recent study by Ibbotson & Associates shows that market movement is the driving force behind portfolio volatility.  Asset Allocation takes a back seat, contrary to the position of king mover it attained during the late 1980s and early 1990s as a result of studies such as the Brinson et. al. papers.  Active management continues to take the rap that it does not add alpha to a portfolio. See Ibbotson quote below.

“As for active management, finding managers who can add alpha over the long term is hard to do. Active management in general hasn’t beaten the market in the long run.”

If you Google “The Equal Importance of Asset Allocation and Active Management” you will gain access to the original paper.

Why does our Mosaic approach to investing seem to be working here at ITA Wealth Management? Platinum readers will note we skew our portfolio asset allocations toward small-cap and value.  In addition, we generally hold higher percentages than the average portfolio in REITs, commodities, developed international markets, and emerging markets. We do this while trying to hold down portfolio risk.  This does not always work to our advantage when large sections of the global market go into decline.