Wednesday, June 11, 2008

Why Asset Allocation is Important

Asset allocation is important.

Several studies have shown that 90 percent of a fund's returns over time can simply be explained by its target asset allocation policy. Because of market efficiency, fund managers practicing market timing and security selection often have difficulty surpassing passively invested funds tracking major indices.

Across all funds, it was found that the asset allocation decision explains an average of 40 percent of the variation in fund returns. For a single fund, asset allocation explains 90 percent of the fund's variation in returns over time and slightly more than 100 percent of the average fund's level of returns.

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