Investing Classroom: Asset Allocation is 'It'?

Portfolio lesson 5.4: Should you focus all your investing efforts on asset allocation alone?

Morningstar 18 March, 2010 | 4:09PM
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Conventional investment wisdom says asset allocation--or how you divvy up your assets among stocks, bonds, and cash--is what drives a portfolio's return. In the minds of many, time spent on security selection, or looking for great investments, is time wasted.

Like most common knowledge, this "wisdom" is rooted in research. A 1986 study by Gary Brinson, Randolph Hood, and Gilbert Beebower (BHB, for short) created a widespread obsession with asset allocation. By the mid-1990s, however, the investing community began to question BHB's findings--or, more precisely, how BHB's findings were being interpreted and applied to portfolios.

This lesson will discuss what BHB's study found, what critics have to say about it, and how you should think about asset allocation and security selection in your own portfolio.

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