This can mean different things for different investors. For a pure equity investor, this may mean holding stocks across different sectors (resources, financials, industrials, etc) and perhaps even different companies within a sector. For the purposes of the above, it would relate to asset allocation. In short, this entails having exposure to various asset classes in order to achieve an investment objective.

A study was undertaken and subsequently published in the Financial Analyst Journal to determine the key driver of performance. The areas explored were stock picking, market timing and asset allocation. The results were clear: 94 percent of investment performance was attributed to asset allocation, with stock picking and market timing sharing the scraps with four percent and two percent respectively.

Not only will diversification through active asset allocation allow for solid mitigation of risk, it will also allow for specific construction relating to your individual needs. In other words, although inflation-beating returns are critical for investment success, each investor may need to beat inflation by different margins and therefore have a different spread of assets to achieve this return.

All said and done, while the principles may seem crystal clear to understand, the next step is to decide on whether one feels adequately equipped to execute and implement these in a meaningful way on your own or whether to employ the services of a professional to take on this responsibility for you and manage it accordingly.

acsis Limited is an authorised financial services provider. The response to the question covers some of the issues in a general and factual manner and does not constitute advice. It is important to consult with a financial planner who, after an analysis of the individuals? personal needs, goals and circumstances, will be able to provide comprehensive and appropriate advice.

The 'behaviour' of various asset classes

Equities Property Bonds Cash Inflation
Highest return 60.5 percent 47.2 percent 33.8 percent 10.2 percent 15.5 percent
Lowest return (-23.2 percent) (-15.6 percent) (-22.5 percent) 4.1 percent 4.2 percent
Negative years 6 4 3 0 n/a
20 year average 16.1 percent 15.0 percent 10.3 percent 7.4 percent 8.7 percent

(Source: acsis Research and Investment Management team)

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