Investing success is as much about having the right process as it is about choosing the right investments. Avoid the barrage of money messages by focusing on one simple question:\u00a0 What is the most important factor affecting your investment return?\u00a0 The answer is: A proper asset allocation strategy based on a balance of your risk tolerance and need for growth.\r\n\r\nAn oft-quoted study, Determinants of Portfolio Performance, showed that over 90 percent of a portfolio\u2019s return variability is due to asset allocation \u2013 more than market timing and security selection. While there\u2019s disagreement among academics over exactly how much impact asset allocation has on performance, in practice it\u2019s the first order of business for institutions with a lot of money to manage.\r\n\r\nFor instance, check out the annual report or update of a typical university endowment (see here for the Stanford University Endowment\u2019s).\u00a0 You\u2019ll likely notice that the first component of the investing strategy addressed is asset allocation.\r\n\r\nMoving to an asset allocation-based passive investment strategy may optimize your own portfolio, and make the difference between retiring on a shoestring budget or a lifestyle of champagne dreams and caviar wishes.\r\n\r\nWhat is Asset Allocation?\r\n\r\nTo help visualize what asset allocation actually means, it\u2019s helpful to use an analogy.\u00a0 We use a soccer team.\u00a0 To build a great soccer team, you need defensive and offensive positions.\u00a0 Having strong players in both areas is critical to accomplishing the team\u2019s objective \u2013 to win.\r\n\r\nIn investing, the offensive and defensive players are like asset classes.\u00a0 Asset classes are types of investments that exhibit similar levels of risk and return, such as equities, fixed income, and real assets. As on a soccer team, you need a variety of asset classes: some that are offensive \u2013 which do well when the economy is charging ahead \u2013 and are defensive \u2013 that do well when the economy is falling behind.\r\n\r\nMixing asset classes is important because asset classes have shown different behavior in different market conditions.\u00a0 In investing speak, they\u2019re not correlated.\u00a0 In practice, investors look at an asset class \u201ccorrelation matrix\u201d to help determine the optimal amount to balance in a portfolio. \u00a0Balancing asset classes helps to decrease portfolio risk without losing returns.\u00a0 A portfolio\u2019s asset allocation that minimizes risk while maximizing returns is called \u201cefficient.\u201d\r\n\r\nThe Impact on Your Portfolio\r\n\r\nAs you think about designing your own portfolio, we return to the initial point: asset allocation trumps stock market timing and security selection. A 2016 report by Standard & Poor\u2019s shows that less than 8% of all large-cap, mid-cap, and small-cap equity funds outperform their benchmarks over a 15-year period. When you look more broadly at all domestic funds, 82% underperform over that 15-year timeframe. Based on these numbers, it is very difficult for an actively managed fund to achieve persistent outperformance in the medium to long term.\r\n\r\nIn other words, tracking the markets has proven to be better, on average, than picking stocks or trusting managers to pick stocks for you. Furthermore, the fees associated with active investing can significantly drag down performance, thereby extending the years you are required to work.\r\n\r\n What Fund Fees do You Pay? Log in to Personal Capital and Check the Cost Tab of Your Investment Checkup \r\n\r\nIf you decide to design your portfolio with passive investments, the great news is that it reduces your workload in that it requires few changes after the initial investment selections.\u00a0 However, designing a proper allocation and sticking with it can be more difficult than it seems. An incorrectly allocated or not properly diversified portfolio or investing strategy can be an expensive mistake.\r\n\r\nFor instance, choosing overly-conservative investments may result in lower than necessary returns, a smaller retirement fund and less money to live on retirement. A too-aggressive portfolio exposes an investor to unwanted risk, and may result in lost capital if withdrawals are required when the market is low. The key is to do an honest self-assessment of your risk tolerance and your desired realistic investment returns and financial goals to come up with a balanced solution and a good asset mix.\r\n\r\nPotential Allocations\r\n\r\nLet\u2019s look at a couple of appropriate allocations.\u00a0 Let\u2019s say you\u2019re 30 years old and plan to retire when you\u2019re 65.\u00a0 You can likely afford to take a good level risk and put a big chunk of your money in equities.\u00a0 Here\u2019s what an allocation might look like for you:\r\n\r\nAGGRESSIVE\r\nAn aggressive growth allocation for those with a long time horizon and who are willing to take a high degree of risk in pursuit of higher returns:\r\n\r\n\r\n\r\n\t\r\n\t\tASSET CLASS\r\n\t\tASSET ALLOCATION\r\n\t\r\n\t\r\n\t\tDomestic Equities\r\n\t\t60.2%\r\n\t\r\n\t\r\n\t\tInternational Equities\r\n\t\t25.8%\r\n\t\r\n\t\r\n\t\tDomestic Fixed Income\r\n2.2%\r\n\t\r\n\t\r\n\t\tForeign Fixed Income\r\n0.8%\r\n\t\r\n\t\r\n\t\tAlternatives\r\n10.5%\r\n\t\r\n\r\n\t\tCash\r\n0.5%\r\n\t\r\n\r\n\r\n\r\n\t\r\n\t\tRISK\r\n\t\tRETURN\r\n\t\r\n\t\r\n\t\t15.5%\r\n\t\t9.3%\r\n\t\r\n\r\n\r\nLet\u2019s say you\u2019re 55 years old and don\u2019t plan to retire until you\u2019re 70. \u00a0You've got some other expected income streams, like social security and your firm's pension fund, so you can still take risk in your portfolio. Depending on your other finances, you should not likely take the same level of risk as the 30-year-old.\u00a0 Here\u2019s what an allocation might look like for you:\r\n\r\nGROWTH\r\nA long-term growth allocation with moderately lower volatility than an all stock portfolio. This allocation is often suggested for those who are several years from retirement or who need or want high growth in retirement. \r\n\r\n\r\n\t\r\n\t\tASSET CLASS\r\n\t\tASSET ALLOCATION\r\n\t\r\n\t\r\n\t\tDomestic Equities\r\n\t\t52.8%\r\n\t\r\n\t\r\n\t\tInternational Equities\r\n\t\t22.8%\r\n\t\r\n\t\r\n\t\tDomestic Fixed Income\r\n10.6%\r\n\t\r\n\t\r\n\t\tForeign Fixed Income\r\n2.4%\r\n\t\r\n\t\r\n\t\tAlternatives\r\n10.5%\r\n\t\r\n\r\n\t\tCash\r\n1%\r\n\t\r\n\r\n\r\n\r\n\t\r\n\t\tRISK\r\n\t\tRETURN\r\n\t\r\n\t\r\n\t\t13.5%\r\n\t\t8.8%\r\n\t\r\n\r\n\r\nWhat is Your Level of Risk Tolerance?\r\n\r\nYou can begin to determine your risk level by considering the following:\r\n\r\n\tRisk tolerance (comfort with market fluctuations)\r\n\r\nTake our risk tolerance assessment to see where you might fall: do you lean towards aggressive, moderate, or conservative?\r\n\r\n\tTime horizon (how long until you will need to withdraw funds)\r\n\tYour investment knowledge\r\n\tTotal assets\r\n\r\nSimplify this process and get a customized asset allocation recommendation with Personal Capital\u2019s Investment Checkup tool.\r\n\r\nWant to Dig Deeper into Your Portfolio?\r\n\r\nAs the single most important ingredient in long term investment returns, it is critical to understand the asset allocation of your entire investment portfolio.\u00a0How heavily should you be investing in mutual funds? How about index funds? What about alternative investments like real estate? Yet accurately identifying it can be challenging and time-consuming.\r\n\r\nWe can help. Monitor your investments easily and securely with Personal Capital\u2019s award winning free service, which provides a valuable overview of all of your investment accounts. Personal Capital\u2019s new proprietary Investment Checkup analyzes your portfolio(s) to help make sure you\u2019ve got the proper asset allocation that suit your overall investment objectives. \r\n\r\nIn addition to analyzing your portfolio(s), Personal Capital can also help track your income, spending, assets and liabilities, and provide additional customized investment assistance. To grow your finances it\u2019s important to first have a good grasp of your overall financial picture.\r\n\r\nStill have questions or want to learn more? Contact a financial advisor.\r\n\r\nContact a Financial Advisor\r\n\r\n*Editors Note: This post was originally published in January 2014 and has been updated for accuracy and comprehensiveness.