Investing in markets can be confusing. You hear such things as “Diversify your portfolio” or “Find the proper asset allocation” or in more simple terms “Don’t put all your eggs in one basket.”

All these terms simply refer to asset allocation among your investments, but what does that mean to the average investor, and why does it matter?

Think of asset allocation as a recipe for an investment portfolio. We all know recipes involve blending different amounts of various ingredients, usually followed by some type of cooking or baking. If you follow the recipe, the result is relatively predictable. Some recipes are simple and easy to follow, while others are more difficult, contain more ingredients and often require more knowledge and experience. Where you purchase the ingredients is not as important as knowing which ingredient to use and what amount of each to include.

Investment portfolios operate the same way. You blend together various asset classes (ingredients) according to certain allocations (appropriate quantities). You then “cook” the portfolio for a period of years. In the investing world, you might need to stir your recipe occasionally, which means rebalance the portfolio.

In the end, the asset allocation (having the proper ingredients and quantities) largely determines the outcome. Where you purchase the ingredients isn’t as important to the outcome, meaning whether you purchase one company’s mutual funds or another’s exchange traded funds is not as important as the asset allocation model, or the portfolio recipe.

To help illustrate why asset allocation is important, let’s review the average performance of some sample recipes from 1970-2016. We’ll look at the returns for these recipes as two different results: rate of return and inflation-adjusted rate of return.

If you don’t understand the need to consider an inflation-adjusted rate of return, think about this: In 1970 you could buy a home for about $26,000, a new car for $3,500 and a gallon of gas for 36¢. How much more did those items cost in 2016?

Let’s first look at a simple recipe for 100 percent cash. Cash is only one asset class, but many investors hide in cash when they’re afraid of the stock market or worried about bonds. The average return over this 47-year period was 4.97 percent. This sounds pretty good by today’s standards, but the inflation-adjusted rate of return was only 0.90 percent.

Next, let’s look at a very conservative recipe of 50 percent cash and 50 percent bonds. The average return was 6.33 percent, but only 2.21 percent when adjusted for inflation. If we look at a mix of 60 percent large-cap U.S. stocks and 40 percent U.S. bonds (typically referred to as a “balanced fund”), the average returns jump to 9.59 percent, or an inflation-adjusted rate of 5.35 percent.

Now let’s look at a “gourmet” recipe. A multiclass portfolio with equal portions of seven asset classes (large cap U.S. stocks, small cap U.S. stocks, non-U.S. developed stock, real estate, commodities, U.S. bonds and cash) rebalanced annually, we get even better results. This recipe averaged 9.75 percent, or 5.49 percent adjusting for inflation. This comparison suggests that an investment portfolio recipe with more ingredients has historically offered better inflation protection than a portfolio lacking diversification.

Author Erin Morgenstern once stated, “You don’t have to be a chef or even a particularly good cook to experience proper kitchen alchemy: the moment when ingredients combine to form something more delectable than the sum or their parts.” Maybe if we think of asset allocation in terms of this kitchen alchemy, we’ll all strive for that delectable result.

Wendy Bennett is a senior financial adviser in Butler.