Most diversified portfolio investment performance results from the asset allocation decision and not specific manager performance within an asset class.  Below are the results of several different studies on the subject – anywhere from 70% to 90% of investment performance depending on the time frame of the study.

Thus, I am both amused and bewildered at the disproportionate effort between asset allocation decisions and investment manager selection by investment consultants (for larger institutions) and investment advisors (for individuals).   Most of the energy is spent on reviewing the performance of the managers that they have selected and yet there is very little analysis on the asset allocation decision that was driving 80% of the returns in the first place.

Gary P. Brinson, L. Randolph Hood, and Gilbert L. Beebower, Determinants of Portfolio Performance, The Financial Analysts Journal, July/August 1986.

Gary P. Brinson, Brian D. Singer, and Gilbert L. Beebower, Determinants of Portfolio Performance II: An Update, The Financial Analysts Journal, 47, 3 (1991).

Roger G. Ibbotson and Paul D. Kaplan, Does Asset Allocation Policy Explain 40%, 90%, or 100% of Performance?, The Financial Analysts Journal, January/February 2000