Why Asset Allocation Matters More Than You Think
People often ask, “What’s the best super fund?”
It’s an understandable question, but it’s usually not the one that makes the biggest difference over time.
What tends to matter far more is how your money is actually invested across different asset classes – what we refer to as your asset allocation.
In simple terms, that’s the split between things like shares, fixed interest, cash and property within your portfolio. It might not feel like the most important decision upfront, but it has a much greater influence on outcomes than most people expect
There’s been a significant amount of research on this over the years.
In 1986, a paper published in the Financial Analysts Journal had a lasting impact on how the industry thinks about portfolio construction. Titled Determinants of Portfolio Performance*, the study by Brinson, Hood and Beebower looked at what actually drives portfolio returns – including factors like market timing, individual investment selection and asset allocation.
What they found was that asset allocation played the most significant role in both the magnitude of returns and the variability of those returns over time. In other words, it wasn’t picking the perfect investment or getting your timing right that had the biggest influence – it was getting the overall structure of the portfolio right from the start. It’s not just about what your portfolio earns – it’s about how it behaves through different market conditions.
It’s probably easier to think about it like this.
When you’re deciding where to settle your family, the biggest decision isn’t which house you buy – it’s which country you choose to live in. That choice shapes everything: the level of stability, the opportunities available, and how things tend to hold up when conditions become more challenging.
Investing works in much the same way.
Your asset allocation is that “country-level” decision. Whether you’re in a Growth or Balanced portfolio will generally have a much greater impact on your experience than which specific fund or provider you choose.
From there, it comes down to the understanding the trade-offs you’re comfortable making.
Different assets play different roles:
Growth assets, such as shares, are designed to generate long term returns, but they come with periods of market volatility.
Defensive assets, such as cash and fixed interest, are there to provide stability and capital preservation, helping to reduce the impact of market downturns.
There’s no single “right” mix. It depends on what you’re working towards, your investment timeframe and your tolerance for risk and volatility. And importantly, it’s not something that stays fixed. Your circumstances evolve over time and your portfolio should reflect that.
Earlier on, there’s typically greater capacity to take on risk in pursuit of growth. As priorities shift – whether that’s family, lifestyle or transitioning towards drawing an income – the role of stability becomes more prominent.
A well-structured asset allocation reflects that progression, helping ensure your portfolio remains aligned with the life you’re actually living
*Brinson, G. P., Hood, L. R., & Beebower, G. L. (1986). Determinants of Portfolio Performance. Financial Analysts Journal, 42(4), 39–44. https://doi.org/10.2469/faj.v42.n4.39