The famous Brinson, Singer and Beebower study that suggests 91.5% of a portfolio’s return can be explained by asset allocation is something that financial planners and investment adviser are quick to cite when making investment recommendations to clients. The study, however, looked at pension plans and not individual portfolios, leaving one to ask a very important question: what does the study mean for my personal investment portfolio? (Typically, individual portfolios are not as large as pension plans).

Interestingly enough, there is definitely a lot of relevance in the study insofar as personal portfolios are concerned. This makes sense, assuming that individual investors are able to invest the way that pension managers do. This is where there are problems; pension managers are cold and emotionless when it comes to making investment decisions for their portfolio whereas individual investors have a much more relevant relationship with the money they have spent their working lives saving.

As well, pension funds also have something called an investment policy which outlines what the pension manager can and cannot do with the pension’s assets. Very few investors will take the time to come up with a logical investment policy and when they do, it is often the policy that changes rather than the investments over time.

Something worth noting when evaluating how to incorporate asset mix into an individual portfolio and enjoy the same type of results that pension managers enjoyed during the period of the study is to realize that asset mix will shift with time. While the pension funds in the study never dropped an asset class entirely during good or bad times, the portfolio did shift, albeit ever so slightly. The same should hold with a personal portfolio; making initial investment decisions that will not require knee-jerk reactions to alternating economic data. And perhaps this is one of the biggest lessons to be learned from the study: asset mix will always matter provided that the underlying assets are the right ones.

In other words, asset mix will have a tremendous impact on an individual portfolio’s returns provided that the individual holds the right assets. For example, sticking to an asset mix that incorporated higher risk, volatile assets will typically have less of a long-term impact than a portfolio that is build on solid, highly correlated assets that have been properly analyzed.

With these realities in mind, the first thing investors should determine is, of course, their ideal asset mix. The second thing that the investor needs to do is build an investment policy that sticks to this asset mix. And the third and often most important step is choosing the securities that will make up the overall asset mix. The rest involves sticking to the plan and making decisions that are consistent with that investment policy.

–> Small Cap Funds Reviewed at MutualFundSite.org.

Chris has more than 17 years of financial services experience. In addition to serving as the fund advisor for the Mutual Fund Site, he currently manages a website about the latest Novaform Mattress Sale at NovaformMattressSale.com.