Three of the most important determinants of that growth are the asset allocation, security selection and market timing.

Asset allocation

Asset allocation is the blend between different broad asset classes such as shares, cash, bonds and property. In other words, a conservative asset allocation might have 25 percent in shares, and more in cash, bonds and property. A more aggressive asset allocation will have 80 percent in shares and only 20 percent in the others. This blend affects the ultimate performance of the portfolio.

Security selection

The next element is security selection. Now that we have decided to place this percentage of your money into shares, which specific shares should we buy? You would also ask the same question relating to the specific properties, and cash deposits that you ultimately put the money in.

Market timing

Now that you know what percentage will be placed into the different asset classes and you also know the specific shares, property trusts and so on, that you will invest into, the next question is when to buy, and when to sell — market timing. There are many fancy computerised tools and all sorts of techniques to help people assess when to buy and when to sell.

Each of these three components plays a role in the ultimate performance of the portfolio. But they are not equally important in the final outcome. If you were smartly allocating your time, you would spend most of your time on the one that makes the greatest contribution to the final outcome. But which of these is the most important? That will be discussed next time.