In 1986, Brinson, Hood, and Beebower determined that asset allocation is responsible for over 93% of the variation of portfolio performance. Though this might be true in a theoretical world without expenses and emotions, we’ve all seen the data with the gap between investor return and fund return. That’s because clients fiddle with asset allocation, chasing performance. Unfortunately, there is also significant data to show that advisors, as a whole, also have this problem.

Over the 15-year period that ended on Dec. 31, 2013, stocks and bonds had similar returns, with annual returns for U.S. stocks at 5.38%; international stocks, 5.15%; and bonds 5%. Intuition, combined with the benefit of hindsight, tells us that a 100% U.S. stock portfolio would have outperformed any combination since the other asset classes had lower returns.

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