Building a portfolio

• Asset allocationHow you divide money between asset classes — the decision that drives most of your long-run experience.
• Concentration riskThe risk that too much of your outcome depends on one holding, sector, country or currency.
• Core and satelliteHolding a large low-cost index core, with smaller active positions around it.
• CorrelationA measure from −1 to +1 of how closely two investments move together.
• CovarianceHow two investments move together, measured in units that also reflect how much each one moves.
• DriftHow far your actual weights have moved away from the weights you intended to hold.
• Effective number of holdingsHow many equally weighted holdings your portfolio behaves like, given how uneven the real weights are.
• Efficient frontierThe curve of portfolios that deliver the highest expected return available at each level of risk.
• Fund overlapHow much of the same underlying companies two or more funds hold, so that owning both diversifies less than it appears to.
• Glide pathA plan to shift gradually from higher-risk to lower-risk assets as a target date approaches.
• Home biasThe tendency to hold far more of your own country’s market than its share of the world warrants.
• Investment policy statementA written document setting out what you are investing for, how, and what would make you change.
• Modern portfolio theoryThe framework that treats risk as portfolio-level volatility and finds the best return for a given level of it.
• RebalancingSelling what has grown and buying what has lagged, to return the portfolio to its target mix.
• Rebalancing bandHow far a holding is allowed to drift from its target before you act.
• Risk toleranceHow much decline you can live through without changing your plan.
• Safe withdrawal rateThe percentage of a portfolio you can take each year with a high chance of it lasting your lifetime.
• Sequence-of-returns riskThe risk that poor returns early in retirement do lasting damage, even if average returns are fine.
• Strategic asset allocationThe long-term target mix you intend to hold through cycles, set from your goals rather than from market views.
• Tactical asset allocationDeliberately moving away from your long-term target to reflect a shorter-term view.

Educational reference only. Nothing here is investment advice or a recommendation to buy or sell anything, and tax treatment depends on your own circumstances and the country you are in.