ASSET ALLOCATION is your big picture “pie.” Your mix of stocks, bonds, and cash. Keep it simple.
Stocks are owning businesses and a share in the profits they make. Bonds are making loans and receiving interest. We all know cash.
Historically, stocks (profits of business) have earned ~twice that of bonds (making loans). More risk means more potential for return. Less risk, less return. Again, asset allocation is how you structure your personal pie. What percentage of the 100% pie is stocks, bonds, and cash?
DIVERSIFICATION is more detailed. How you decide to own specific and different flavors; International, Domestic, Small, Large, Value, Growth, Real Estate, etc within stock and bond categories is diversification. The concept is founded in Harry Markowitz’s work and proof of Modern Portfolio Theory. (btw, he is 90yrs old and still working)
The game is to own the right combinations of these within the construct of your “pie” to feel comfortable and to support your financial plans.
