Unit 2 · Level 3 · Asset allocation
Review: the recipe
The mix across asset classes drives most of your outcome, far more than any single pick. Classic recipes like 60/40 and world+bonds package that mix simply. The mix should glide calmer as your goal approaches, and rebalancing is the maintenance ritual that keeps drift from quietly rewriting your risk.
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What you get asked
Which decision does research say explains most of a portfolio's return variation over time?
Roughly 90% in the classic pension-fund studies. The allocation is the steering wheel; picks and timing are the radio dials.
Match the concept to its one-line job
Four tools, one theme: decide the risk on a calm day, then let rules, not moods, maintain it.
After a big stock rally, an untouched 60/40 portfolio becomes MORE ___ than the investor originally chose.
Drift concentrates you in whatever just rose. The portfolio gets riskier precisely when prices are highest. Rebalancing exists to undo that.
What did 2022 honestly teach about the 60/40?
Fast rate hikes sank stocks and bonds together; a typical 60/40 lost roughly 16-17%. Diversification improves your odds; it never issues guarantees.
A €50,000 portfolio drifted to 70% stocks against a 60% target. The rebalancing move is…
70% of €50,000 is €35,000; target is €30,000, so €5,000 moves to bonds. Trim the winner, feed the laggard, back to plan. Next unit: how to feed money IN. 🐜
The rest of this unit
The mix of stocks and bonds decides more than any hot pick ever will.