Unit 2 · Level 3 · Asset allocation
Mix beats picks
Investors obsess over WHICH stock to buy. Research says the bigger question is how much goes to stocks versus bonds versus cash at all. A famous study of large pension funds (Brinson and colleagues) found that roughly 90% of the variation in a portfolio's returns over time was explained by its asset mix, not by clever picking or timing.
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What you get asked
What does 'asset allocation' mean?
It's the recipe, not the ingredients' brand names: what share in stocks, bonds, cash, maybe property. That recipe sets both your expected growth and how hard the ride shakes.
Research on pension funds found roughly ___ of the variation in returns over time came from the asset mix, not stock picking.
The Brinson studies made allocation famous. Whatever the exact figure in later debates, the ranking held: mix first, picks a distant second.
Match each asset class to its role in a portfolio
No class does everything. Allocation is deciding how much engine versus how much stabiliser your journey needs.
Two friends both invest €10,000 for 20 years. Ana holds 80% stocks in a plain index fund; Ben holds 20% stocks but picks them brilliantly. Who likely ends up ahead?
Over decades, being 80% in the growth engine typically matters far more than picking within a 20% slice. Great picks in a tiny allocation move a tiny lever.
Why is 'mix beats picks' good news for normal people?
You can't out-research Wall Street on picks, but you can absolutely choose and hold a sensible mix. The biggest lever is the one anyone can pull. 🐜
The rest of this unit
The mix of stocks and bonds decides more than any hot pick ever will.