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Asset allocation determines investment returns more than individual stock pick from "summary" of The Psychology of Money by Melody Jefferson,Morgan Housel
When it comes to investing, many people believe that picking individual stocks is the key to success. They spend hours researching companies, poring over financial statements, and trying to predict which ones will outperform the market. However, what they often fail to realize is that asset allocation plays a much bigger role in determining investment returns than individual stock selection. Asset allocation is the process of spreading your investments across different asset classes, such as stocks, bonds, real estate, and cash. The idea is to create a diversified portfolio that can help manage risk and maximize returns over the long term. Research has shown that asset allocation accounts for the majority of the variability in a portfolio's returns, with individual stock selection playing a much smaller role. One of the main reasons why asset allocation is so important is that different asset classes tend to perform differently under various market conditions. For example, when stocks are performing well, bonds may not be doing as well, and vice versa. By diversifying across asset classes, investors can reduce the impact of market fluctuations on their overall portfolio performance. Another reason why asset allocation is crucial is that it can help investors stay disciplined during periods of market volatility. When the market is going up, it can be tempting to chase returns by piling into hot stocks. However, this approach can backfire when the market inevitably turns, leading to significant losses. By sticking to a well-thought-out asset allocation strategy, investors can avoid making impulsive decisions based on short-term market movements. In the end, successful investing is not about picking the next hot stock or trying to time the market. It's about creating a well-diversified portfolio that aligns with your risk tolerance and investment goals. By focusing on asset allocation rather than individual stock selection, investors can improve their chances of achieving long-term investment success.
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