Asset allocation is the decision of how to diversify your investment portfolio. The main options are stocks and bonds.
The importance of asset allocation started back in 1986 with a scholarly article titled Determinants of the Portfolio Performance, published in the Financial Analyst Journal.
That article had a ripple effect. Study of asset allocation has lasted decades, and much has been learned.
In summary, asset allocation is important. It is really, really important.
The biggest decision you make about your investment portfolio has to do with the types of investments you own. Asset allocation is by far the greatest influence on the volatility and the return on your investment.
In my opinion, get asset allocation right and you are ahead of the game. Get it wrong and you have virtually no chance of achieving your investment objectives.
Over the years I’ve noticed that the bulk of conversations on investing have been about specific investment alternatives. What stock to buy and what stock to sell and when that transaction should be completed.
In the original 1986 study, the importance of security selection and market timing accounted for less than seven per cent of the performance of an investment portfolio. That means spending the bulk of the time considering what is least important is a colossal waste of time.
Stocks provide the opportunity for a higher return than bonds. Stocks are more volatile.
Peter Watson is an agent of, and securities products are provided by, Aligned Capital Partners Inc. (ACPI). ACPI is a member of the Investment Industry Regulatory Organization of Canada (IIROC) and the Canadian Investor Protection Fund (CIPF). The opinions expressed are those of the author and not necessarily those of ACPI. Peter Watson provides wealth management services through Peter Watson Investments.