Need help understanding asset allocation vs stock picking

Question

Is there an easy to understand explanation of this statement:

Asset Allocation is more important in determining over all returns of the portfolio as opposed to picking the right stocks.

Answer 1

Assets are many, eg. currencies, buildings, real estate, vehicles, inventories, equipment, precious metals, etc.

Stocks are a special kind of assets, where you hold a bit of the underlying company (or, in the ETF case, little pieces of a number of companies).

A core issue of wealth management is the so-called "Asset allocation", which determines the type, and proportion of asset classes to hold, and invest in. (Fictional) example: 30% in real estate, 30% in index-tracking mutual funds, 20% (hand-picked) stocks, 10% bonds, and 10% gold.

In this example, 80% of the portfolio is independent of "picking the right stocks" -it's rate of return will be determined by other factors, than individual company's performance on the market.

In conclusion, Asset Allocation is one step "above" stock picking -it's determining the kind of classes you wish to go with in the first place- and hence, in the vast majority of cases, will be more important in ROI calculation, than the vehicles under the "stock" asset.

Hope this makes sense -comment if further clarification is needed.