the government that issued it will pay you the interest and principal payments as outlined in the bond contract until the bond matures. On the other end of the spectrum, the value of a share issued by an upstart biotechnology company whose entire future is based on a new drug that has yet to be approved by the U.S. Federal Drug Administration will be more volatile because the market is unsure of the future value of the Company. There is generally a pretty strong relationship between the potential return provided by an investment and its volatility. So, each one of us has to decide where the appropriate trade-off between return and volatility is for us personally. This is a combination of our time horizon to retirement, our personal tolerance for volatility and our investment preferences (e.g. someone may want to invest in green energy for personal or ethical reasons). This website will outline 5 investor profiles along the return/volatility continuum.
The Principle of Diversification and its Weaknesses
Most investment books and investment advisors base much of their advice on the principle of diversification. Diversification is a simple principle that most people intuitively understand. It`s commonly referred to in popular english as “not putting all of one’s eggs into one basket”. The idea is that you should hold a number of different investments so that you’re investment returns and the future value of your retirement portfolio are not tied to just one or a few investments. For example, if I only held IBM stock in my investment portfolio and a technological revolution came along tomorrow that crushed IBM and led IBM on a quick path to bankruptcy, my stock would fall quickly and my retirement savings would dissapear.