Developing your portfolio intuition - Diversification is the only free lunch

While most of Modern Portfolio Theory is not very practical (it assumes you can forecast future returns, which is extremely hard), there are there are a couple important ideas in there:

You can get really smooth returns by mixing uncorrelated assets.

The more uncorrelated assets you add, the better risk-adjusted returns you are getting. (up to a point)

My pal, Ray explains this very well in his video:

You even can add an asset with negative returns, and still improve your overall risk adjusted returns.

It's not only an asset's returns that count, but also the way it moves together with the rest of the portfolio (co-variance).

Read this person being surprised about it.

It doesn't matter how an individual assets in your portfolio performed. There's zero information content of someone bragging about their individual stock picks' returns - what matters is how it contributed to their overall equity curve. How it enables them to compound their wealth.

Don't look at the returns of the individual assets you have, only as a whole.

How do I put this into practice?

There's an easy-to-use and free tool available to play around with, to develop an intuition of what it means to create a portfolio: PortfolioVisualizer.

Create a static portfolio with the "Backtest Portfolio Asset Class Allocation" feature: allocate some funds to stocks, bonds and let's say gold.

Check out the different kind of returns and equity curves you're getting based on the different allocation weights.

This and this are both great articles about the topic of uncorrelated assets - although a bit more technical.