Research has shown that asset allocation is the primary determinant of investment returns. In fact, compared to security selection and market timing, asset allocation accounts for more than 93% of a portfolio's investment return.

Asset allocation works because the factors that cause one asset class to peform poorly are often the same factors that cause other asset classes to perform well. For example, equity investments tend to be very highly correlated with corporate earnings, and generally decline during economic recessions. Fixed income securities on the other hand, are more influenced by interest rates and inflation, and may perform well in an economic downturn.

As shown by the chart you can see that asset class leadership changes frequently. By constructing a portfolio that has exposure to a wide array of asset classes investors can reduce the likelihood that one asset class will negatively effect the entire portfolio,

thereby reducing the portfolio's volatility. This reduction in volatility can lead to superior returns in the long run.

Although the benefits of asset allocation are widely known, creating and maintaining a diversified portfolio is more difficult in practice than in theory. Psychology often leads investors to increase exposure to last year's best asset class and reduce exposure to its worst, resulting in a portfolio that may no longer be diversified.

One solution to the asset allocation challenge is to create single portfolios whose objective is to maintain a diversified mix of different asset classes.

Each of the Ibbotson Asset Allocation Portfolios has exposure to 8-12 asset classes in a single Fund. Furthermore, the asset class exposure of each Fund is consistently monitored by Ibbotson in order to react to changes in market conditions, and to rebalance when appropriate.