In a piece written for Forbes’ Intelligent Investing section, David Serchuk today offers some interesting data on risk and portfolio management.

One point made by several of those Serchuk interviewed is that asset allocation is a crucial, and often overlooked, key to managing risk. “The macro-picture here is that asset allocation remains an easy way to get to the core of your portfolio’s risk exposure, even though it gets relatively little attention in the financial media compared with earnings or, to use a more contemporary example, government bailout money,” writes Serchuk.

Support for this idea comes from a study conducted in 1986 by Gary Brinson, Randolph Hood and Gilbert Beebower titled “Determinants of Portfolio Performance”. “They compared quarterly earnings from 91 large, actively managed pension funds from 1974 through 1983 against comparable funds that held similar asset allocations but were passively indexed,” Serchuk explains. “What they found was that asset allocation was responsible for 93.6% of the variation in quarterly returns in a portfolio’s quarterly returns. Not stock picking, not taxes, but asset allocation.”

Vahan Janjigian, Forbes’ chief investment strategist, says that asset allocation is critical in minimizing risk. He also says investors can insure against risk by buying long-term put options to hedge against big sell-offs. “If structured correctly, the gain on the puts resulting from a sell-off will offset the loss in stocks,” he says. “If stocks rise, you participate in the rally but lose what you paid for the puts. This strategy buys you downside protection.”

Janjigian warns against getting too risk-averse in today’s market, however. “I do believe risk is overpriced now,” he said. “Investors who can wait 10 to 25 years should take advantage of the bear market by increasing exposure to equities. They should raise their equity exposure to the upper end of their target range — whatever that might be.”

“The cost of insurance (i.e., put options) is high now,” Janjigian adds. “The time to insure your portfolio is past. You should have been worrying about insuring against a loss when the Dow was at 14,000 — not now. If you don’t want to bear risk now, just stay out of the market. Right now I would rather sell options than buy them.”

Michael Kitces, the director of financial planning for Pinnacle Advisory Group, suggests investors look at all asset classes through the lens Yale Professor Robert Shiller used in determining the 10-year P/E ratio of the stock market. “If you use Shiller’s approach and just slice the data into percentile rankings, you find that ‘cheap’ is somewhere below an 11 to 13 multiple and “expensive” is somewhere upwards of an 18 to 20 multiple,” he says. “The rest is the mushy middle — which is a fine place to be, as that’s pretty much where we are now.”