Asset Allocation and Bad Habits

September 17, 2014
  • Contributors:

    Andrew Ang, Amit Goyal, Antti Ilmanen
  • Topic:

    Asset Allocation

Rotman International Journal of Pension Management

This article documents the “bad habits” of investors in asset allocation practices. Whereas financial markets exhibit momentum over multi-month horizons but more reversion to the mean over multi-year horizons, many investors act like momentum investors even at these longer horizons.

Both these patterns are well known anecdotally but have not been well documented statistically, especially together. This article therefore addresses two empirical questions: How do funds reallocate based on past returns? And what are momentum/reversal patterns in financial markets returns?

In addressing the first question, the authors provide direct evidence using the CEM Benchmarking Inc. data on pension fund target allocations over a 22-year period. In addressing the second question, they provide evidence using more than a century of data.

Merging the findings from the two data sets provides evidence consistent with the premise that investors chase returns over multi-year horizons, which is likely to hurt their long-run performance. However, the statistical evidence on pro-cyclical multi-year asset allocations and multi-year mean reversion patterns in asset-class returns is on the borderline of statistical significance.

  • The views and opinions expressed herein are those of the author and do not necessarily reflect the views of AQR Capital Management, LLC, its affiliates or its employees.
  • The information contained herein is only as current as of the date indicated, and may be superseded by subsequent market events or for other reasons. Neither the author nor AQR undertakes to advise you of any changes in the views expressed herein.
  • This information is not intended to, and does not relate specifically to any investment strategy or product that AQR offers. It is being provided merely to provide a framework to assist in the implementation of an investor’s own analysis and an investor’s own view on the topic discussed herein.
  • Past performance is no guarantee of future results.
  • Certain publications may have been written prior to the author being an employee of AQR.