Investment Policy

In 1986, there was a study published by Gary P. Brinson, L. Randolph Hood and Gilbert L. Beebower called Determination of Portfolio Performance. There study followed 91 pension funds to dissect where portfolio performance is derived.  They divided up plan returns into three components: asset allocation policy, active asset allocation, and security selection.   There research came back that, based on the pension funds that they researched, investment policy dictated, on average 91.5% of the variation in quarterly plan returns.

Whose portfolio is equivalent to a pension fund???  I think I hear birds chirping.

With that being said, a new study has come out published by Roger Ibbotson, James X. Xiong, Thomas M. idzorek, and Peng Chen titled, Asset Allocation and Investment Strategy are Equally Important. This study concluded that the majority of any portfolio’s returns is attributable purely to the beta – the movement of the markets.  According to the study as much as 70% of returns are from a portfolio’s beta.

Wow.  Whoope-ta-doo!  That really answers all the questions out there about how to invest.  I think we can all breathe a sigh of relief now that we have that information at our fingertips.

Unfortunately, we all have to live in the real world where our portfolios are structured like pension funds and investment decisions have an impact on our lives.  Of course, if you look at the performance of many pension funds maybe it is a good thing that individual investors don’t HAVE to invest like them.