Unit 2 · Level 3 · Asset allocation
Classic recipes
Some allocations are so battle-tested they have names. The 60/40: 60% stocks, 40% bonds, the classic balanced ride. The three-fund: home stocks + international stocks + bonds. The world+bonds: one global stock fund plus one bond fund. Two lines, done. None is 'best'; they're different trade-offs between growth, wobble, and simplicity.
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What you get asked
Match each classic portfolio to its recipe
All of these can work. The differences are how much they wobble and how much upkeep they demand, not some secret superiority.
2022 was a famously brutal year for the 60/40 portfolio. Why?
Rapid rate hikes hit both sides at once: US bonds had one of their worst years in decades while stocks fell too, and a typical 60/40 lost roughly 16-17%. Diversification usually helps; 2022 was the honest reminder that 'usually' isn't 'always'.
The main selling point of the world+bonds two-fund portfolio is ___: nothing to tinker with, little to get wrong.
Two funds cover thousands of companies and bonds worldwide. Boring by design, and boring is remarkably hard to beat after fees and mistakes.
What's the honest reason more bonds in a mix usually means smoother returns?
Bonds wobble less and often (not always; see 2022) zig when stocks zag. You trade some expected growth for a calmer ride you can stick with.
How should you choose between these classic recipes?
The best portfolio on paper is worthless if you abandon it in a crash. Match the recipe to your timeline and your stomach, then leave it alone. 🐜
The rest of this unit
The mix of stocks and bonds decides more than any hot pick ever will.