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PR Newswire
21-10-2023, 08:21 AM
Studies have shown that asset allocation accounted for most of the returns in an investment portfolio compared to selecting the items within an asset class.
You should not be surprised by this. Let me give you an analogy.
Suppose that you are betting on the winner of a race where there are 5 different participants - car, bus, motorbike, bicycle, and horse.
It is no brainer to see that choosing the best vehicle (asset) will contribute more to the returns than selecting the best items among the worst asset. Think of this in the context of stocks.
While stock pickers and traders primarily focus on individual stocks, I hope the above shows why asset allocation is also important. By diversifying your holdings across different asset classes, you can manage better risk and return.
You should not be surprised by this. Let me give you an analogy.
Suppose that you are betting on the winner of a race where there are 5 different participants - car, bus, motorbike, bicycle, and horse.
- I am sure you would place most of your money in the car. Even the slowest car would beat the fastest bicycle. This is the asset allocation analogy.
- However, if you know that there a broken bridge ahead crossing the river, you would choose the horse. Risk has also to be considered.
- If the race is to see 10 people reaching the finishing line first, you would choose the bus. You have to take into account constraints.
It is no brainer to see that choosing the best vehicle (asset) will contribute more to the returns than selecting the best items among the worst asset. Think of this in the context of stocks.
While stock pickers and traders primarily focus on individual stocks, I hope the above shows why asset allocation is also important. By diversifying your holdings across different asset classes, you can manage better risk and return.