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This means that if your portfolio returns 10%, 9% was due to your decision to be in that asset class, whereas only 1% was down to your choice of fund or share.

The importance of asset allocation is now widely accepted. Why then, do most investors still spend 90% of their time researching which fund manager to use?

Unfortunately, it’s impossible to know in advance which asset class is going to perform the best. Even with the best research it is only possible to make educated guesses.

The best way of ensuring consistent returns is a sensible mix, within investments in a variety of asset classes which don’t all move in the same direction at the same time.

This approach has come under fire since the financial crisis. Investors who used sophisticated “portfolio optimisation” tools to construct the most “efficient” portfolio particularly suffered, as previously uncorrelated assets all fell at once.

What the crisis has done is show that “optimising” a portfolio is impossible. Even the most sophisticated models are based on historic data (not always a guide to the future) together with various assumptions (guesses!).

However, the principles of diversification remain sound. In the credit crunch, equities, corporate bonds and property all fell at once, but government bonds, many “absolute return” funds, and cash all did ok. Those with a sensible mix of these asset classes should have weathered the storm well.

Although no one can accurately predict which asset class will do the best over a single period, it is possible to judge whether an asset class looks under or over-valued compared to history. This is not fool proof, but a good manager can add value by making adjustments to asset allocation based on their analysis.

For example, in 2007 property funds started seeing significant outflows. Outflows in property funds can lead to liquidity problems, meaning funds have to sell properties quickly, which in turn means falling prices. Therefore, significant, sustained outflows from property funds are a definite “sell” signal. This told us to reduce, and eventually exit property altogether.

Having raised plenty of cash by selling property, this was then available to take advantage of market lows.

In early 2009 the price/earnings ratio on the UK stockmarket reached around 7, half the long term average of approximately 14. The dividend yield was higher than the 10 year Gilt yield. These and other indicators convinced us that equities were good value compared to history and other asset classes and we went “overweight”.

These types of changes can add significant value if sensibly implemented. However, even if you get these calls right you are always going to be too early, too late, or very lucky.

As equities have risen we have reduced holdings, topping up other assets. As markets have kept going up we have clearly been “too early”. However, if markets turn, this will work in our favour.

Asset allocation is all about managing risk. If risk is kept to a minimum, not only can short term losses be reduced, but long term gains increased and returns become more consistent.