Gilbert Beebower – I don’t know about you, but to me that sounds like the name of a nerd.
In fact, one of the nerdiest names I’ve ever heard of. So you wouldn’t be surprised to learn that Gilbert Beebower isn’t an American football player, he’s an American academic.
And after an introduction like that, you’re probably thinking Gilbert has done some useful research in his time and specifically on the investment front.
Gilbert and his colleagues, Gary Brinson and Brian Singer, produced a study called “Determinants of Portfolio Performance”, which they followed with an ingeniously titled sequel: “Determinants of Portfolio Performance II: An Update”.
These two studies showed that asset allocation is the major determinant of portfolio performance.
The studies analysed over 80 large US pension funds (superannuation funds) and both times found that over 90% of the difference in portfolio returns could be attributed to asset allocation.
In other words, how you structured a portfolio amongst shares, bonds, cash or property, was vastly more important than individual selection of any asset, or the timing of investment purchase.
When assets with different characteristics are combined within a portfolio an investor can achieve higher returns with lower risk, or simply put; we’re talking about the benefits of our old friend ‘diversification’ again.
If two assets have a lower correlation it will lower the risk across a portfolio. International shares may seem risky, but if you add them to your Australian shares you’ve just lowered your risk by having less money exposed to one region.
One may go up, the other may go down, but given we understand the futility of forecasting, there’s no way of knowing the future direction of any asset class and that’s why the structure of a portfolio is so important.
I guess you can call today’s knowledge of portfolio structure, Revenge of the Nerds!
Peter Mancell is a director of Mancell Financial Group and FYG Planners AFSL 224543. This information is general in nature and readers should seek professional advice specific to their circumstances. If you’d like help with your financial future, we might be Australia’s best financial planner. We think we’re Tasmania’s best financial adviser and
