February 12, 2021 Matthias Weber

Does investment strategy really explain 90% of performance?

Which question Gary Brinson actually answered in 1986.

Your investment advisor tells you, “Your investment strategy will account for 90% of your investment success, it will determine your wealth 20 years from now.”

So, in the long term, your wealth depends almost exclusively on whether you invest an average of, say, 20% or 70% of your assets in equities over the years?

Therefore, it hardly plays a role how actively you manage your portfolio? Which stocks you buy exactly? Whether you hold fewer shares in anticipation of market corrections to buy them back after the crisis?

No, this is not quite true.

In fact, this statement only applies to wealth variations, to the ups and downs of your assets. But not to how rich you are in the end. As your investment advisor mistakenly thought.

Brinson’s insight based on an analysis of U.S. pension funds: On average, a pension fund’s investment strategy explains 90% of its variation in wealth!

So, the strategy explains 90% of the ups and downs, but not 90% of the future level of wealth. And this only in the average of all funds. The more actively a pension fund is managed, the less relevant the investment strategy.

And if you compare pension funds with each other instead of looking at them individually?

On average, differences in investment strategies account for only half of the differences in wealth fluctuations between individual pension funds. The other half is due to differences in market timing, style bets, and security selection.

Why is this percentage much lower than above? Because the commonalities in the investment strategies are not taken into account here and only the differences are considered. These strategic differences are no longer so significant in comparison to active management.

But now what about the level of performance? To what extent does the investment strategy determine your wealth in 20 years?


On average…

Because, of course, the investment strategy explains 100% of the performance level on average of all investors: active management is a zero-sum game, the expected alpha is zero on average: all investors together ARE the market – some gain what others lose. If the successful investors are on average 10% ahead of the market, then the unsuccessful ones are on average 10% behind the market – apart from costs.

What remains on average is the beta or the market performance.

If you rely on investment strategy, then you can go with the flow as a free rider. In the long run, you will be adequately compensated for your willingness to take risks: With 100% in equities, you will move rapidly forward in a wild current. With 100% in savings, you float leisurely on a wide river.

If, on the other hand, you rely solely on your skills and don’t care about a strategy, you are entering a shark tank: no current, but close combat! In this zero-sum game, you have to be smarter and faster than almost everyone else to make a profit; otherwise, you’re just financing the pleasures of the biggest sharks and end up with nothing.

First conclusion: If you invest exclusively passively, the investment strategy accounts for 100% of your investment success. The more actively you invest, on the other hand, the less important and, in extreme cases, irrelevant the investment strategy becomes.

Second conclusion: If you rely on a passive investment strategy, you can benefit as a free rider from the long-term positive market performance. If, on the other hand, you rely solely on active bets, you enter a zero-sum game against the best.

The choice is yours. Do you want to passively settle for the average or actively aim higher?

Pride goes before fall.

We’ll get into why humility is indicated in active management.

Background information for those interested:

Ibbotson, Roger G.. (2010). The Importance of Asset Allocation. Financial Analysts Journal. 66. 10.2469/faj.v66.n2.4.

Ibbotson, Roger & Kaplan, Paul. (2001). Does Asset Allocation Policy Explain 40, 90, 100 Percent of Performance? Yale School of Management, Yale School of Management Working Papers. 56. 10.2469/faj.v56.n1.2327.

Brinson, Gary & Hood, L. & Beebower, Gilbert. (1986). Determinants of Portfolio Performance. Financial Analysts Journal – FINANC ANAL J. 42. 39-44. 10.2469/faj.v42.n4.39.

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