13. Cost Savings and What Really Matters

In the department of “not seeing the forest for the trees”, something very odd happened a number of years ago to our investment culture despite good research on the topic. In 1986, Gary P. Brinson, L. Randolph Hood, and Gilbert L. Beebower (BHB) published a paper in the Financial Analyst Journal entitled “Determinants of Portfolio Performance”. They sought to explain the effect of asset allocation policy on pension plan returns, a topic that had largely been unexplored up to that point. BHB asserted that asset allocation is the primary determinant of a portfolio’s return variability, with security selection and market timing (together, active management) playing minor roles. According to their findings, asset allocation explained the variation in a portfolio’s quarterly returns more than 90% of the time.