Long Term Approachstrategy for rotating winners

The chart below compares the various asset class boxes for a 10 year period1. The top row shows the asset class that performed the best each year, and the bottom row shows the asset class that performed the worst each year2. It would be nice if you could identify the best asset class every year, but no one has proven the ability to do this on a consistent basis. So with no obvious pattern, how do you know which asset class to be in?

What box you are in matters...A LOT
A 1991 study by Brinson, Singer and Beebower investigated the determinants of portfolio performance3. By studying the quarterly returns of 82 pension plans over a 10-year period, they concluded that:

  • Asset class could explain 91.5% of the plans variation
  • Other factors, such as market timing and actual security selection, only accounted for 8.5%

Wide Asset Class Exposure extensive diversification

Since the repercussions for being in the wrong place at the wrong time could be financially devastating, it is important to develop a well-balanced portfolio diversified across many asset classes - allowing you to take advantage of the strong returns of each year's winners, and minimize the impact of each year's losers.