The Only Free Lunch in Finance
Nobel laureate Harry Markowitz famously described diversification as the only free lunch in economics. By combining asset classes that do not move in perfect lockstep—such as equities, fixed income, real assets, and cash equivalents—you reduce portfolio volatility without sacrificing long-term expected returns.
Building an Age-Appropriate Allocation
A standard strategic allocation factors in both time horizon and risk tolerance. Younger accumulators with decades until retirement can tolerate higher equity exposure (e.g., 80/20 or 90/10 equity-to-bond ratio). Investors approaching preservation phases shift gradually toward fixed income and capital-preservation assets.
The Discipline of Periodic Rebalancing
Rebalancing involves systematically trimming overperforming assets and redeploying the proceeds into underperforming assets once per year or when target thresholds drift by 5%. This automated process forces you to sell high and buy low without emotional interference.