We believe that the most important aspect of any investment is to provide each investor with a selection of assets which match their attitude to risk. ‘Asset Allocation’ as this is known, has been shown to be the most important aspect of successful investing over the long term.
Professor Harry Markowitz was awarded the Nobel Prize for mathematically proving that asset allocation and diversification work and later research showed that asset allocation is the most important factor in determining the performance of investment portfolios.*
* DETERMINANTS OF PORTOFLIO PERFORMANCE, PUBLISHED IN THE FINANCIAL ANALYSTS JOURNAL IN JULY/AUGUST 1986 AND UPDATED MAY/JUNE 1991, GARY P BRINSON, L RANDOLPH HOOD AND GILBERT BEEBOWER.
One of the first steps is to understand what the different asset types are and how they can be used in effective portfolio construction. Asset allocation relies on different types of assets rising and falling at different times which smoothes out the total returns.