A widely cited study by Brinson, Hood, and Beebower (in 1986, and then updated in 1991) found that asset allocation accounts for approximately 90% of the variation in portfolio returns over time, while investment selection and market timing play a much smaller role.
It is why diversification is crucial if you want to build a portfolio that can outperform in a wide range of market conditions. By spreading your investments across various asset classes, sectors and geographic regions, you reduce the impact of any single investment's poor performance. In essence, "don't put all your eggs in one basket".
This risk management strategy helps to mitigate volatility and potentially stabilise returns, meaning that if one investment declines, others may offset those losses. While it doesn't guarantee profits or eliminate all risk, diversification significantly enhances the likelihood of achieving long-term investment goals by smoothing out the inevitable ups and downs of the market.
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