How to build a simple portfolio
The decision that explains most of your result is not which stocks, but how much of each kind.
The first and most important decision
Different studies give different figures, but they all agree on the direction: the overwhelming share of a portfolio's movement is explained by the split between asset classes, not by the choices within them.
In other words, "what percentage in stocks" matters far more than "which stocks".
That is good news: the most important decision is also the simplest, and it requires no forecasting at all.
A worked example
Choose your split
A twenty-year horizon and a good tolerance for risk: 80% global stocks, 20% bonds.
Contribute automatically
The same amount every month, split in the same proportions. No decision to make each month.
Rebalance once a year
If stocks have grown to 88%, sell a little and buy bonds until you are back at 80/20.
A structure that is enough
One broad global stock fund covers thousands of companies across dozens of countries. One fund of quality bonds covers the stable part.
For most people, two funds are enough. Adding a third or a fourth should answer a concrete question, not the urge to own more.
The proportions depend on your horizon: the further away the day you need the money, the larger the stock portion can be.
Maintenance
Contribute regularly and automatically. Rebalance once a year. Look at it rarely. That is the whole job.
Resist the temptation to make it more complicated. Every new layer adds cost, confusion, and one more decision you can get wrong.
The best portfolio is not the one with the highest expected return. It is the one you will actually hold for ten years, bad years included.
Splits by time horizon
| When you need it | Stocks | Bonds and cash |
|---|---|---|
| Under 3 years | 0% | 100% |
| 5 to 10 years | 50-70% | 30-50% |
| Over 15 years | 80-100% | 0-20% |
Key terms in this lesson
- Asset allocation
- How a portfolio is divided across types of investments. The decision that explains most of the result.
- Target weight
- The percentage you have set for each part, and the one you return to when rebalancing.
- Core and satellite
- A broad, cheap base, plus small positions for everything else.
Quick check
Which decision explains most of a portfolio's movement?
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