Why It's So Hard To Beat The Market

Here's a rather sobering view for those investors seeking to beat the best asset class (equities) over time.

The accompanying table* illustrates the asset allocation decision only. It assumes that an investor does not outperform during the up or down markets but is able to make consistently excellent asset allocation calls (being largely in up markets and even more largely out of down markets).

Numerous studies show that for well diversified portfolios the asset allocation decision overwhelmingly determines investment performance (85% of investment performance). Therefore, getting this call right matters most. Getting this call wrong, however, destroys investment performance to a considerable degree and makes outperforming the market (alpha) that much more difficult.

Understanding this fact helps explains the momentum lemming, risk on/risk off nature of the market (especially the current environment). Falling too far behind is, for some, running the risk of losing their house in Greenwich.

*click image to enlarge