Asset Allocation For Dummies®

Chapter 4. Determining the Right Proportions: Your Asset Mix

In This Chapter

• Understanding the importance of asset allocation

• Getting a grip on correlation and its potential power

• Taming risk drag

• Getting your portfolio to deliver more than the sum of its parts

• Discovering what to look for in an asset

In this chapter, we explain why asset allocation — selecting your assets and mixing them together correctly — is the single most important thing you can do in investing. And we introduce what we call our guiding principle of asset allocation, to help direct your actions as you build your portfolio.

We address diversification — but also make clear that diversification alone isn't enough. We go further in this chapter to help you uncover and use the secret of negative correlation to your benefit. Negative correlation is considered the holy grail of investing — it's hard to find, but it can produce almost mystical qualities in a portfolio. If you can identify assets with good long-term growth potential, but whose short-term up-and-down movements essentially cancel each other out, then you may be able to create a portfolio that will outperform each of the assets within it!

Throughout this chapter, we reveal the underlying concepts of asset allocation. Without a solid understanding of asset allocation fundamentals and why they work, you may be tempted to make an unwise move with your portfolio — chasing a "hot" stock tip or following the lead of a friend who doesn't understand the big picture, ...