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Allocation band
Accepted variation around a target weight. Define the allowance in percentage points or relative percent, and the action at its limits.
Two different allowances
For a 20% target, ±2 percentage points gives 18–22%. An allowance of 2% relative to the target gives 19.6–20.4%.
Allocation drift
Current weights departing from targets because of prices or cash flows. A percentage can shrink without a sale. Drift describes the mix, not the next price movement.
Asset allocation
The division among categories such as shares, bonds and cash. Targets specify intended roles/proportions; current allocation describes actual holdings. Several accounts may form one overall allocation.
Asset class
A broad economic category such as shares or bonds, containing different risks. Short government debt and long lower-quality corporate debt are both bonds; the label alone establishes no suitability.
Concentration risk
Amplified loss from dependence on one holding or shared exposure. Multiple funds can overlap in companies or economic drivers; ticker count does not measure independence.
Combined holdings and dependence
Correlation
Sample-based co-movement of returns: positive tends together, negative opposite. Near-zero linear correlation is not independence. Estimates depend on period, frequency and currency; relationships can change.
Diversification
Spreading exposures within/across categories to reduce dependence on particular outcomes. It cannot remove all portfolio losses; several funds can still hold substantially the same exposures.
Different holdings, shared losses
Drawdown
Decline relative to a previous peak. Maximum drawdown is the largest observed peak-to-trough fall in a specified period. Separate external spending/contributions from investment performance; the sample supplies no future loss bound.
Peak and starting-value losses
Exposure
Connection to a source of gains/losses, directly or through fund holdings. Borrowing/derivatives can make economic exposure differ from cash paid or collateral posted.
Leverage
Magnifying gains/losses relative to supporting capital through borrowing or derivatives. Terms can permit losses beyond the initial payment and demand action before the intended holding period ends.
Liquidity
Ease of conversion to cash without substantial price concession/cost, even after a market loss. Settlement, restrictions and transfers can still delay spendable money after sale.
Rebalancing
Adjusting towards intended exposure through flows, distributions, purchases or sales. It maintains the chosen mix without establishing a return advantage or requiring a trade at every review.
Risk
Uncertain outcomes, loss or failure to fund the intended need. Capital loss, eroded purchasing power and unavailable money differ; one fluctuation statistic cannot describe them all.
Risk capacity
Financial ability to absorb adverse outcomes while meeting commitments, given resources, deadlines, reliable income and goal flexibility. Emotional comfort cannot supply cash for a bill.
Risk tolerance (willingness)
Willingness to accept uncertainty/loss and maintain the plan during declines. Some sources include financial capacity in “tolerance”; this handbook separates willingness from ability to bear loss.
Time horizon
Time before money is needed. A payment sequence has several horizons: retirement’s first bill can be near, later bills decades away. Long intended ownership removes no earlier obligation/access restriction.
Volatility
Variation in returns, gains and losses. Historical low volatility establishes neither capital protection, access nor a maximum future loss. A drawdown instead measures decline from a peak.
Fluctuation and lasting consequence
Weight (capital weight)
Holding/group value divided by the defined portfolio’s current value, using consistent valuations, dates and currency. State subgroup denominators. Capital weight alone is neither economic exposure nor contribution to risk.