Follow the formula

Asset allocation usually follows a general formula involving stocks, bonds, and cash. For instance, you might allocate 80% of your total investment to stocks, 10% of it to bonds, and 10% of it to cash or cash equivalents.

A portfolio like this, with a lot of stock, has more potential to increase in value over the long term — and as a young person, you definitely have a very long term ahead of you. But a stock-heavy portfolio also tends to fluctuate more in value. So you don’t want to get nervous if your account value drops from time to time — at least not so nervous that you give up investing. There’s time for it to come back.

Once you allocate, you also have to diversify. Think back to that one stock that turned out to be a bad choice. If you’d owned stock in more companies, it’s reasonable to assume that they all wouldn’t have had problems at the same time, especially if you chose different types of companies that were in different businesses.