Asset Allocation

Studies of institutional portfolios consistently find that allocation policy explains the large majority of the variation in returns over time, far more than security selection — which is why the allocation decision deserves more attention than it usually receives. The right allocation depends on the horizon and on the capacity to bear a fall, not on a forecast: someone needing the money in two years should hold little equity regardless of how attractive equities look. Allocation also determines how a portfolio behaves in a crisis, which is when the decision is tested. Age-based rules of thumb are starting points, not answers.