One of the “dirty little secrets” of the investment industry is to deliberately misrepresent the findings of a study on the importance of asset allocation. The study, commonly referred to as the BHB study after the three gentleman who conducted the study, found that asset allocation explained 93.6% of the variation in an investment portfolio’s returns. The study made no representations about the determinants of an a portfolio’s returns, only the variations in a portfolio’s returns.
The study examined three general types of investments – stocks, bonds and cash. Stocks are generally acknowledged as riskier than bonds, and bonds are generally acknowledged as being riskier than cash. So the BHB study should not come as a surprise to anyone. higher allocations to stocks, as compared to bonds and cash, can be expected to increase a portfolio’s overall volatility, or variation in returns.
Investors who understand the true findings of the BHB study and that fact that it made no representations as to the determinants of a portfolio’s actual returns and better protect their financial security by detecting misrepresentations regard the value of investment recommendations.
For an excellent analysis of the true meaning of the BHB study, click here.