The importance of asset allocation, or deciding what percentage of a portfolio to devote to various asset classes, cannot be overstated. Especially equity and corporate bond investors spend enormous efforts on picking individual investments, while they spend relatively little time on deciding what types of stocks or bonds to buy into their funds. Numerous empirical studies have shown that a large part of money managers’ performance can be explained by asset allocation, not by their selection of individual stocks. Therefore it should be just the opposite. Investors should spend most of their time on overall asset selection and ignore individual investments for the most part. When a stock performs well, invariably stocks from the same asset classes follow in parallel. The primary goal should be to pick the right asset classes in order to outperform. Asset allocation is not easy and requires completely different skills than the selection of individual investments, but it is less detailed, and it rewards skilled investors generously.

Before 2001, credit played a minor role in the asset allocation of private as well as institutional investors. This is due to the fact that there was no easy and cost efficient way to replicate the performance of credit markets appropriately.