Asset allocation is dividing a portfolio among major asset categories such as bonds, stocks, real estate, and cash to reduce the risk of the portfolio. If one investment loses a lot of value, diversifying limits how much money will be lost and reduces the risk of giving up everything you put in. The downside of diversification is that if one investment gains a lot of value, not too much money will be made.
In the final analysis, your …
Generally speaking, risk and rate-of-return are directly related. As the risk level of an investment increases, the potential return usually increases as well. The pyramid of investment risk illustrates the risk and return associated with various types of investment options. As investors move up the pyramid, they incur a greater risk of loss of principal along with the potential for higher returns.
Pyramid of Investment Risk
Source: National Institute for Consumer Education, 1998