The quote below is from John Bogle (former Chairman of Vanguard Investments) and canalso be found on page 176 in the BKM text.The most fundamental decision of investing is the allocation of your assets: How much shouldyou own in stock? How much in bonds? How much in cash reserves? . . That decision [hasbeen shown to account] for an astonishing 94% of the differences in total returns achievedby institutionally managed pension funds. . . There is no reason to believe that the samerelationship does not also hold true for individual investors. John BogleMr. Bogle emphasizes the importance of asset allocation and indirectly cites the results ofthe Brinson study as proof.However, there is an error in Mr. Bogles quote. Your assignment is to identify and explainthe error. please Paraphrase the attachment file
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Research Articles Assign | Spring 18
Research Articles Assign
Professor: Michael Radin
Research Articles Assign | Spring 18
The quote below is from John Bogle (former Chairman of Vanguard Investments) and can
also be found on page 176 in the BKM text.
The most fundamental decision of investing is the allocation of your assets: How much should
you own in stock? How much in bonds? How much in cash reserves? . . That decision [has
been shown to account] for an astonishing 94% of the differences in total returns achieved
by institutionally managed pension funds. . . There is no reason to believe that the same
relationship does not also hold true for individual investors. John Bogle
Mr. Bogle emphasizes the importance of asset allocation and indirectly cites the results of
the Brinson study as proof.
However, there is an error in Mr. Bogles quote. Your assignment is to identify and explain
The error is he emphasis on asset allocation that is passive management of the investment. His
quote includes only two decision:
Decision 1: Choice of asset classes.
Decision 2: Choice of fixed normal asset class weights.
The passive management or indexing might work in bull markets it does not work well in flat or
bear markets and it will give below average returns when Indexing and over diversification
portfolio suffers when we own some inferior investments along with good investments.
A lot of portfolio manager and professional investor rank asset allocation as the most important
tool of investing. The importance of asset allocation is explained by Brinsons studies. The studies
show a strong relationship between asset allocation and the variability of return over time.
However, it does not cover questions such as: how much of the variability of returns across time
is explain by asset allocation? How much of the variation in return among funds is explained by
differences in policy? Or what portion of the return of level is explained by policy return? The
Roger G.L bbotson and Paul D. Kaplan article goes in details in explaining these questions and
concluded: 40 percent of the variation of returns among funds was associated with the asset
allocation and 35 percent was attributed to the pension fund sample. 40 percent of the total return
is due to asset allocation on variation of funds and the remaining 60 percent is explained by other
factors, such as asset-class timing, style within asset classes, security selection, and fees.
Therefore, John Bogle makes an error on his statement when he mentions 94 percent of the
differences in total returns are explained by asset allocation.
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