Topic
Once you know what stocks, bonds and funds are, the next question is how they fit together into one portfolio.
Once you know what stocks, bonds and funds are, the next question is how they fit together. These notes explain why spreading money across many investments reduces some risks but not all, how asset allocation sets the overall level of risk, what rebalancing does, how dollar-cost averaging compares with investing a lump sum, why your time horizon and tolerance for losses matter, and how to read volatility and drawdown figures. The notes describe methods; they do not recommend a mix for you. The notes below are listed in reading order: start at the top, or jump straight to the question you have. Every note ends with its numbered sources.
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Diversification means not letting one investment decide your fate. Here is the arithmetic of spreading money out, the two levels regulators describe, and the limits nobody should skip.
Read the noteAsset allocation is the split of your money between stocks, bonds and cash. It sets how much your portfolio can rise and fall more than any single pick does. Here is how the mix works.
Read the noteMarkets quietly change your mix: winners grow, losers shrink. Rebalancing puts the percentages back where you chose them. Here is the arithmetic and a step-by-step routine.
Read the noteInvesting the same amount every month buys more shares when prices are low and fewer when they are high. Here is the arithmetic, and an honest look at when a lump sum does better.
Read the noteTwo questions shape almost every investing plan: how much loss can you live with, and when do you need the money? Here is how regulators define each, and why they have to be answered together.
Read the noteVolatility is how much an investment's returns bounce around. A drawdown is how far it falls from its last high. Here is how each is measured, and why a big fall needs an even bigger gain to recover.
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