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Sipps: See you later, allocator

INVESTMENT GUIDE: The most important investment decision you are likely to make about your pension – and one that will dictate more than any other your future level of living – is asset allocation
March 5, 2008

Deciding how to spread your money across different assets is the most investment important decision you'll ever face. Academic studies have shown that asset allocation accounts for the vast majority of returns over time – more than nine-tenths of whatever return you make will be determined by this one factor. By contrast, stock-picking and timing are responsible for the remaining one-tenth of returns, at most.

Yet most people focus mainly on stock-picking and timing. After all, everyone loves a hot tip. And whereas we all drool over the thought of buying into a share just before it really starts to rocket, it's hard to get nearly as excited over the dry matters like how assets move in relation to one another and what proportions of each we should hold in our portfolios. But this is precisely what theory and practice tell us we should do.

A Sipp gives you much greater influence over asset allocation than any other type of pension. This privilege also places a huge responsibility onto the individual and onto any advisors involved. You and they need to think regularly about your holdings and whether they are appropriate given market trends and also in light of your changing circumstances.

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