Want to generate long-term returns? Here’s Bell Potter’s asset allocation playbook

Right at the top of Bell Potter's 2026 Strategic Asset Allocation guide, Crookston cites research that found roughly 90% of a portfolio's return variation over time is explained by how you divide your money between asset classes.

As he points out, the findings are often misinterpreted as negating the role of active management in generating excess returns.

“While active investment decisions can demonstrably lead to significant dispersion in portfolio performance, strategic asset allocation remains a fundamental determinant of a portfolio’s overall direction and forms the fundamental groundwork for an investment strategy,” Crookston says.

Yet for many investors, this is the decision that gets made once, forgotten, and never revisited. The result, he argues, is portfolios that have drifted from their intended risk profile, are paying for diversification they don't actually have, or are sitting in the wrong place on the risk-return spectrum for where the investor actually is in life.

The diversification trap and how to avoid it

Diversification is just about the most agreed upon rule in investing - Crookston even calls it a “free lunch”. In much the same way that “time in the market beats timing the market” works because it’s damn near impossible to pick when the best and worst days will be (more on this later), diversification works because it’s almost as difficult to project which asset classes will outperform.

“No one has a crystal ball to predict which asset class will be the top performer in any given year. An asset class that is at the top one year could be at the bottom the next. To protect capital across market cycles, investors should diversify."

“By allocating to a mix of uncorrelated assets, investors can build a portfolio that is more resilient across the entire business cycle. For example, bonds have historically proven effective at offsetting the volatility of equities during periods of market stress, acting as a crucial stabiliser as seen in the initial COVID shock in 2020.”

So, what about diversification could be a trap? According to the report, holding too many products can add complexity and transaction costs, making it harder to align risk with financial goals.

“The reason why we look to remain diversified is to reduce unsystematic (asset-specific) risk, with empirical evidence suggesting the incremental benefits of diversification decrease as the number of products or underlying investments increases,” Crookston says.

“This could be caused by a high level of overlap between portfolios, leading to redundant exposure, while adding additional products increases transaction costs and complexity in managing a portfolio, making it harder to maintain an optimal asset allocation.”

As mentioned earlier, in order to maintain a diversified asset allocation and ensure that your portfolio maintains its risk-return objectives, you need to actively rebalance back to the original target allocation in order to avoid asset allocation drift.

“This is due to the varying performance of asset classes, resulting in potential overweight positions to outperforming asset types in a portfolio and underweight positions to poor performing assets,” Crookston adds.

“Given asset class returns are not permanent, this can expose an investor to higher or lower risk than what they are comfortable with, resulting in a portfolio that no longer meets their investment goals.”

The cost of sitting on the sidelines

Looking at ASX 200 daily trading data over the past 20 years, investors who stayed fully invested would have earned an annualised return of 6.9%. Investors who missed just the 10 best-performing trading days over that period earned 4.1%.

That 2.8 percentage point difference per year, compounded over two decades, results in a massive gap in returns.

The timing of those 10 days matters as much as their existence. Four of the top 10 best-performing days on the ASX over the past 20 years occurred in and around the COVID crash of March 2020. Investors who moved to cash during the selloff, which might have felt like the rational thing to do at the time, missed the sharpest recovery period in recent market history.

“Investors who shifted to cash during the market downturn would have missed out on material upside and faced an additional decision of timing their re-entry, thus potentially missing out on the subsequent market rally,” Crookston notes.

The data on holding periods reinforces the point. Investors with a one-year holding period experienced portfolio losses 22% of the time, with a maximum loss of 25% and maximum gain of 52%. Investors with a 10-year holding period experienced no losses over the same historical period. Extending the holding period from one year to 10 reduces annualised return volatility from 15% to just 2%.

The Bell Potter asset allocation framework

Breaking down how Bell Potter designs its asset allocations, Crookston highlights three distinct stages: risk profiling, capital market assumptions, and portfolio optimisation.

Every portfolio is mapped to risk profiles ranging from conservative to high growth, each with different return objectives, investment horizons and expected returns.

Conservative portfolio: 30% growth assets, 70% defensive – targets a return of CPI plus 1.5% over the long term, translating to a nominal return objective of 4% per annum. Bell Potter forecasts this portfolio delivering 5.6% annualised returns with 4.8% to 5.1% volatility, with 2-3 negative annual returns expected over any 20-year period. Minimum suggested investment timeframe: three years.

Balanced portfolio: 50% growth, 50% defensive – targets CPI plus 2.5%, or 5% nominally. Forecast return: 6.1% to 6.2% annualised, with 6.6% to 6.8% volatility. Three to four negative years expected per 20.

Growth portfolio: 70% growth, 30% defensive – targets CPI plus 3.5%, or 6% nominally. Forecast return: 6.7% to 6.8% annualised, with 8.6% to 9.0% volatility. Four to five negative years per 20. Minimum seven-year timeframe.

High growth portfolio: 90% growth, 10% defensive – targets CPI plus 4.5%, or 7% nominally. Forecast return: 7.3% annualised, with 10.8% to 11.2% volatility. Five to six negative years per 20. Minimum nine-year timeframe suggested.

Strategic or tactical?

The culmination of Bell Potter’s philosophy is the combination of Strategic Asset Allocation (SAA), which serves as the “long-term bedrock” of its portfolios, and Tactical Asset Allocation (TAA), which is an “active overlay”.

“The SAA is our long-term framework designed to meet the portfolio’s core objectives. Its primary role is to keep us grounded, ensuring that even as we make active decisions, the portfolio does not drift from its core,” Crookston explains.

“In contrast, our TAA makes short-term tilts from the SAA based on our short-term views. This process is driven by our analysis of the macroeconomic environment and its investment implications. A disciplined, scenario-based forecasting process determines our tactical asset allocation.”