Why market selection and holistic asset allocation may matter more than stock picking.
Many clients believe that the main value of professional wealth management lies in picking the right stocks. They expect advisers and portfolio managers to identify superior companies and generate long-term outperformance through careful selection.
My experience in delegated portfolio management suggests that, in practice, this model has important limitations. Even when supported by strong research, stock-level strategies can create unintended risks for long-term client relationships. These risks are not only financial, but also psychological and structural.
This raises a broader question: how can professional expertise be applied in ways that support both investment performance and durable client trust?
The relational risk of stock-level bets
When clients delegate investment decisions, performance is rarely evaluated in purely statistical terms. Gains and losses are filtered through emotions, expectations, and perceptions of competence.
Behavioural research shows that people are loss averse: they experience losses more strongly than equivalent gains. This phenomenon was first documented by Kahneman and Tversky and remains one of the most robust findings in behavioural economics.
In delegated settings, this bias is amplified: Underperformance is often interpreted not only as a market outcome, but as a mistake in professional judgment.
I’ve seen portfolios where one or two poorly timed stock positions dominated the client’s perception of several years of otherwise solid performance. Even when the overall strategy remained sound, attention focused almost exclusively on those individual decisions.
This creates an asymmetry:
- Periods of strong performance are quickly normalised.
- Periods of weak performance receive disproportionate attention.
Because individual holdings are highly visible and easy to question in hindsight, stock picking intensifies this effect. Over time, this can undermine trust even when the broader strategy remains robust.
Timing, benchmarks, and fragile evaluation
From a relationship perspective, timing matters almost as much as skill.
Trust in advisory relationships develops gradually. Early underperformance, particularly when linked to specific stock decisions, carries a high risk of termination. Even in mature relationships, one year of severe underperformance can outweigh many years of steady results.
At the same time, passive indices (market benchmarks such as the S&P 500 or FTSE 100) are now constantly visible. The rapid growth of low-cost index funds and Exchange-traded funds (ETFs), which allow investors to track entire markets with a single product, has made benchmarks easily accessible to most investors.
Large-scale studies, including the S&P Dow Jones Indices SPIVA scorecards, consistently show that most active managers struggle to outperform passive alternatives over long horizons.
When portfolios perform differently from these benchmarks because of large investments in individual company shares, these differences become highly noticeable and emotionally charged for clients. As a result, managers are often evaluated on short-term relative outcomes rather than on long-term strategic consistency.
Beyond stocks: applying expertise at the market level
Taken together, these dynamics do not imply that professional judgment has lost its value. Rather, they suggest that its application needs to evolve.
One promising direction is to shift the focus from selecting individual securities to actively selecting:
- markets,
- regions,
- sectors,
- and broad risk exposures.
Research shows that asset allocation and broad market exposure explain a large share of long-term portfolio outcomes. In my experience, this suggests a different model of active management: less focused on individual securities and more focused on strategic positioning and total wealth design.
In this approach, advisers combine passive instruments, (ETFs and index funds that track broad markets like the S&P 500, global equity or bond indices), with active decisions about where and when to allocate capital. ETFs and index vehicles, provide efficient implementation, while professional expertise guides positioning.
This creates a productive synergy between active and passive investing:
- passive tools deliver cost efficiency and transparency,
- active decisions shape the portfolio’s strategic direction.
Market-level positioning is also less vulnerable to hindsight bias than individual stock selection.
Re-centring wealth management on holistic allocation
A second implication concerns the role of liquid assets; those traded on the capital markets and are daily accessible.
In many advisory relationships, liquid portfolios receive disproportionate attention because they are visible and frequently priced. Yet, for many high-net-worth clients, they represent only one component of total wealth.
The Capgemini World Wealth Report 2025 shows that Ultra-High-Net-Worth (UHNW) portfolios typically include substantial allocations to private equity, real estate, and operating businesses.
A narrow focus on liquid performance risks distorting strategic priorities. On the other hand, a more robust model places asset allocation at the centre, integrating:
- liquid and illiquid assets,
- growth and income strategies,
- short-term liquidity and long-term commitments.
Within such a framework, liquid portfolios serve as stabilisers, opportunity pools, and risk-management tools, rather than as isolated performance contests.
Implications for long-term advisory relationships
Shifting from stock-level bets to market-level positioning and holistic allocation offers several relational advantages:
- Performance becomes easier to interpret,
- communication becomes more forward-looking,
- short-term noise becomes less dominant,
- trust becomes less sensitive to isolated outcomes.
Studies on financial advice quality show that long-term planning and behavioural coaching are central drivers of client satisfaction.
The adviser’s role evolves accordingly: Instead of competing with benchmarks through security selection, professionals focus on helping clients navigate complex trade-offs over time like growth vs resilience, liquidity vs commitment, opportunity vs protection.
Lessons for management and governance
These insights extend beyond wealth management.
While research on performance measurement shows how visible indicators distort decision-making, in many organisational settings, leaders are still evaluated through narrow, short-term metrics.
Highly visible failures dominate memory, while steady competence is often taken for granted. More resilient systems prioritise structure, diversification, and robustness over isolated optimisation.
Conclusion
Active stock picking remains an important tool in professional investment management. However, its prominent role in delegated wealth management carries relational and psychological risks that are often underestimated.
Applying professional expertise at the level of markets, regions, and asset allocation — while using passive instruments for implementation — offers a more stable and transparent foundation. Combined with a holistic view of client wealth, this approach aligns investment strategy more closely with how clients evaluate outcomes and build trust.
In an environment shaped by loss aversion, visible benchmarks, and long-term relationships, sustained value is created less through isolated bets and more through coherent, adaptive systems.
- This blog post represents the views of its author(s), not the position of the London School of Economics and Political Science Department of Management.
- Photo by tatyanakorenyugina on Canva.
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