Fortunately, the answer is not as elusive as some investors may assume.

From time to time, Smart Investing refers to a recently-updated research paper, Vanguard's principles for investing success. The paper suggests that investors take four fundamental steps in their efforts to succeed: Set appropriate investment goals, develop an appropriate long-term asset allocation for your portfolio, minimise investment costs and keep your emotions under control.

Perhaps the central theme is that investors should focus on what they can control. "Instead," the authors write, "too many focus on the markets, the economy, [fund] manager ratings or the performance of an individual security or strategy, overlooking the fundamental principles..."

The significance of a portfolio's asset allocation - the proportions of its total assets that are invested in different asset classes of mainly local shares, international shares, property, fixed interest and cash - should not be underrated.

Repeated research over the years highlights the crucial role of a portfolio's long-term asset allocation in determining an investor's success.

For instance, a landmark research paper - Determinants of portfolio performance by Gary Brinson, Randolph Hood and Gilbert Beebower - confirmed in 1986 that a diversified portfolio's target or strategic asset allocation is responsible for the vast majority of its return over time.

This research has been revisited since including by its original authors and by Vanguard researchers in Australia and the US. (See The global case for strategic asset allocation, published last year.)

The long-term performance of large super funds with diversified portfolios illustrates the benefits of setting and keeping to a long-term target asset allocation for your portfolio - while not getting caught up in prevailing market emotions.

The latest report by superannuation fund researcher SuperRatings tracks how $100,000 invested 10 years ago in a balanced super fund would have grown. (It is assumed that the fund produced average returns for a balanced fund. SuperRatings defines a balanced fund as one with 60-76 per cent of its portfolio in growth assets.)

The $100,000 would have reached a pre-GFC peak of $158,283 by October 2007 before falling to a GFC low of $118,670 in February 2009 and then more than recovered to $193,148 at the end of April this year - $74,478 above the GFC low.

Consider the possible consequences if a fund member lost his or her nerve in the depths of the GFC, abandoned a long-term asset allocation and switched to an all-cash portfolio at the bottom of the market.

Such attempts at trying to time the market would have led to many investors selling at a loss when the market was at or near a GFC low only to probably buy back at higher prices after the market had risen.

By Robin Bowerman
Smart Investing
Principal & Head of Retail, Vanguard Investments Australia
24th May 2014