How important is asset allocation?
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Meir Statman* is the Glenn Klimek Professor of Finance at the Leavey School of Business, Santa Clara University. His research focuses on behavioural finance. He attempts to understand how investors and managers make financial decisions and how these decisions are reflected in financial markets. Meir’s research has been published in The Financial Analysts Journal, The Journal of Portfolio Management, The Journal of Finance, The Journal of Financial Economics, The Journal of Financial and Quantitative Analysis and many other journals. The research has been supported by the National Science Foundation, the Research Foundation of the Institute of Chartered Financial Analysts and the Dean Witter Foundation. Meir is a member of the Editorial Board of the Financial Analysts Journal, the Advisory Board of the Journal of Portfolio Management and the Journal of Investment Consulting, an Associate Editor of The Journal of Financial Research and a recipient of a Batterymarch Fellowship, a William F. Sharpe Best Paper Award and two Graham and Dodd Awards of Excellence. Meir consulted with many investment companies and presented his work to academics and professionals in many forums in the US and abroad. Meir received his PhD from Columbia University and his BA and MBA from the Hebrew University of Jerusalem. *Glenn Klimek Professor of Finance, Leavey School of Business, Santa Clara University, Santa Clara, CA 95053-0388, USA. Tel: ⫹1 408 554 4147; Fax: ⫹1 408 554 4029; e-mail: [email protected]
Abstract Strategic asset allocation is part of the management of investors. Tactical asset allocation and security selection are part of the management of investments. Financial advisers provide great value as managers of investors as well as managers of investments; they do not increase their value by misinterpreting Brinson, Hood and Beebower’s study to imply that strategic asset allocation is more important than tactical asset allocation and security selection. This paper focuses on the value of financial advisers, the importance of strategic asset allocation, tactical asset allocation and security selection, and the interpretation of Brinson, Hood and Beebower’s study. Keywords: portfolios; strategic asset allocation; tactical asset allocation; financial advisers; behavioural finance
Good strategic asset allocation is like tailoring a well-fitting suit. Good tactical asset allocation and security selection is like weaving the suit’s fabric at a low cost. Both are important, but they are distinct. High-quality fabric woven at a low cost provides little comfort when it drapes a size-40 body in a size-46 suit.1 Financial advisers are tailors more than they are weavers; they are investor managers more than they are investment managers. But investors see more value in weaving than in tailoring; they are more willing to pay for investment management, with its focus on beating the market, than for investor management,
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Journal of Asset Management
with its focus on the examination of financial resources and goals, diagnosis of deficie
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