The allocation of assets is the single most important step in successful investing. A study by Brinson, Hood, and Beebower found that 94% of the variation of returns among institutional portfolios was the result of the asset allocation, 4% was attributable in security selection and 2% from market timing. Asset classes can be stocks, bonds, cash, real estate, emerging markets and subdivisions of all of the above, such as large companies or small companies.
Diversification is the key to minimizing losses during declines in the stock market. Spreading your assets across multiple categories will yield returns at considerably less risk. In addition, maintaining the proper allocation of assets ensures that your portfolio remains focused on your long-term objectives.