In “The Importance of Asset Allocation,” well-known researcher Roger G. Ibbotson, founder of Ibbotson Associates (and current CIO of Zebra Capital and Yale business school professor) disputes the widely held notion that asset allocation policy explains more than 90% of performance. In the article, currently available in the March/April 2010 CFA Institute Financial Analyst Journal, Ibbotson and his research team demonstrate that general market movement accounts for about 75% of a typical fund’s variation over time, with the remaining portion split almost evenly between specific asset allocation and active management.

“Most of the variation in a typical fund’s return comes from market movement,” the authors explain. “Funds differ by asset allocation, but almost all of them participate in the general market instead of just holding cash.” In other words, the rising tide of market movements lifts all boats, just as an economic drought will drop them—and asset allocation will protect investors from this tidal movement much less than we all believed.