The stock market can seem unpredictable — there are a thousand details to think about and remember, and there's no shortage of anecdotal stories of massive loss and lucky wins from friends, family and co-workers. Your best bet? Becoming an informed investor.
Part of being informed is understanding where your assets are held, diversifying your portfolio to minimize risk and investing across asset classes and types.
In other words, get familiar with portfolio allocation and what kind of arrangement of assets works best for you and your goals.
Basics of portfolio allocation
Portfolio allocation is an investment strategy that aims to balance risk and reward. Allocation aligns assets according to your goals, risk tolerance and time frame.
There are three main asset classes — stocks, bonds or cash — and they all have different levels of risk and return. That means each one will behave differently, based on different factors, and perform in a particular way that's unique compared to the other two types of assets you hold.
You can find additional subclasses of assets within these three main types. These include assets like small-cap stocks, corporate bonds and money market funds.
Allocation is the specific mix of asset classes you hold in your portfolio. And your specific portfolio allocation won't look exactly like someone else's. It gives you a group of investments tailored to you.
The importance of diversification
Diversification means spreading your investments across different asset classes, industries and risk levels to ensure that your money is as protected from risk as possible. For example, your portfolio shouldn't be 100 percent technology. You probably don't want to hold 85 percent bonds, either. Both of those examples are too focused on one area. If one of those asset classes suffers, your whole portfolio tanks with it.