Chapter 7: Basics of Portfolio Building
How do you best allocate your assets?
Well it depends
Depending on how you allocate your assets, your portfolio will be riskier or safer and have more or less gain potential. Allocation is an effective way to adjust your risk/reward balance while still maintaining investments in the same companies.
For example, if you are happy with owning 5 stocks but believe owning more will hinder your ability to outperform the market, you can still adjust your risk level.
To be a bit safer, you could allocate a larger percentage of your portfolio to one of your safer stocks and reduce the allocation to some of your riskier stocks.
This way, the safer stock will have a greater impact on your portfolio, while the influence of the riskier ones is minimized.
Below is an example of the loss the portfolio would sustain if one of the risky stocks were to go down 50%