The studies (Brinson and successors) converge: the split between broad asset classes explains most of the variability in a portfolio's return, far more than the choice of individual securities or timing. In other words, the most important decision is taken before you buy your first share.
The founding question: your horizon
Allocation is not deduced from a market opinion, but from your situation: how soon will you need this money, and what fall can you bear without panic-selling? A long horizon allows more equities; a need in three years demands caution.
Reference points, not dogma
- Long horizon (15 years or more), high tolerance: equity-dominated, often through broad ETFs.
- Medium horizon: a mix of equities and bonds, the bond portion cushioning the shocks.
- Capital needed in the short term: favour safety — a short horizon and equities make poor bedfellows.
The real measure of your risk tolerance
It is not what you declare in fair weather, it is what you do during a crash. Ask yourself honestly: if my portfolio loses 35% in six months, do I hold, or do I sell at the worst moment?
Allocation before securities
An excellent stock-picker with an allocation unsuited to their horizon will fail. An average investor with a coherent allocation will often succeed. The order of priorities matters.
À retenir
- ✓Allocation explains most of the variability in returns.
- ✓It follows from your horizon and your real tolerance, not from a market forecast.
- ✓Decide the allocation BEFORE choosing securities.