Asset Allocation Vs. Stock Picking & Market Timing

Do you wonder if you can really win in the stock market?  Or for that matter if your mutual fund manager can do any better?

There was a study published in 1995 “Determinants of Portfolio Performance” that studies the performance of 91 pension funds over a 10 year period.  In particular, the focus was on distinguishing the relative importance of stock picking, market timing and asset allocation on overall returns.Income asset allocation

The result, asset allocation had the most significant impact on the performance differences between funds.  In fact, it was credited for 94% of the variation between fund performance.

What does this mean?  First, it means that stock picking and market timing have little to do with even professional managers ability to create wealth.  Examples of those making great gains are offset by the corresponding losses of others.  It means that putting your money into the appropriate types and balance of investment classes will contribute more than attempting to pick the right stock or fund.  Further, actively managed funds that attempt to pick stocks and time the market will have the same challenges.

Remember the Wall St. Journal “Monkey vs. Professional” stock picking contest?  I think the pros won, but it was no resounding victory.  The fact that this feature ran in the Wall St. Journal for 11 years is telling in and of itself.

Choosing the right asset classes and allowing them to grow and prosper may be the single, most simple solution to creating real long term wealth.

By the way, real estate is an excellent way to build wealth.  Many have done it, so can you.