Bottom-up Investing: No, this is not a reference to Kim Kardashian breaking the internet. Bottom-up mutual fund managers research companies individually and without regard to the current economic cycle, geography, or other big picture considerations.
Asset Allocation: I’ll spend more time on this later. For now, know that Asset Allocation is the combination of different broad categories of investments that you have in your portfolio. For example, if you asset allocation is 85% stock and 15% bonds, you have an aggressive growth portfolio.
Efficient Frontier: This is used to describe the graph from Modern Portfolio Theory that shows different historical risk and returns for various combinations of stocks and bonds in portfolio. Efficient Frontier and Modern Portfolio Theory are often cited as an argument for keeping a diversified portfolio.
Risk Tolerance: As financial advisers, we need to know how much risk you are willing to take in order to recommend appropriate investments. Unfortunately, during up stock markets (like the last 6 years) people’s appetite for risk tends to go up because they want the big returns. Enter the next recession (NO, I don’t know when it will be, but I promise we will have one. The markets are cyclical after all.), and suddenly people don’t like risk so much after all. What you really need to explain to your adviser is how much you are willing to lose and at what point you will be curled in the fetal position and screaming at your adviser on the phone. That is called Loss Tolerance and it is much more useful than Risk Tolerance.
Next time, more about Asset Allocation!
Stay Informed and Educated — Subscribe to the SFP Blog! Use the quick and easy form to the right of this article.