Old habits die hard. A new approach to investing

An Outdated Mode of Thinking
We’re all familiar with the Brinson study originally unveiled in the 1980s on the importance of asset allocation. This groundbreaking study found that over 93% of a portfolio’s return variance could be explained by asset allocation. Over the years, many asset managers and advisors have used this study as the basis for creating and managing client investment portfolios.

Without question, asset allocation is a critical component to a portfolio’s risk and return variance. However, the Brinson study does not address a key question: What role does market movement play in explaining return variance?

A New Reality
Roger Ibbotson & Associates published their award-winning research study, The Equal Importance of Asset Allocation and Active Management in the May 2010 issue of the Financial Analysts Journal. In the study, Ibboston concluded that return variations in portfolios are driven primarily by general market movements, and not asset allocation strategy.

As illustrated in the chart below, Ibbotson found that 80% of return variation is driven by the direction of the markets.

At a time when many investors are searching for answers, Ibbotson’s groundbreaking research has provided the industry with the most important academic conclusions in decades on the drivers of portfolio returns.

Market Movement outweighs other factors as the primary driver of investor’s return experience

Market Movement
The chart below provides a clear illustration of what Market Movement looks like. Market Movement, the overall direction of stock and bond markets, is accountable for approximately 80% of an investors’ experience.

Sec Bull Bear

The Impact of Market Movement on Investor Emotions
The chart below provides a clear illustration of what Market Movement feels like. There is no getting around it, investor behavior is strongly influenced by two basic emotions: fear and greed.

Cycle of Emotion

The Impact of Market Movement on Investor Returns
Many investor portfolios are primarily reliant on Market Movement for returns and therefore have experienced more volatility than expected. This has influenced them to make poorly timed buy and sell decisions based more on emotion than discipline. As a result, research clearly shows that investors often under perform the very asset classes in which they are invested.


We believe that to control the impact of Market Movement, portfolio construction should be focused on diversifying not just across asset classes, but across strategies that employ Market Movement or significantly disengage from it. As the sources of risk and return in a client portfolio expand, so too do the opportunities to enhance returns in different market cycles.

At Market Movement Solutions, we find these conclusions so powerful and critical to portfolio construction, our investment process is built around the recognition and management of Market Movement within our three mandate process.

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Market Movement Solutions

Reshaping the Investor Experience

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