The concept's essence is that decisions are made at the portfolio level. Individual instruments are evaluated not in isolation but by their contribution to overall returns and risk: a low-yield bond may be valuable for reducing fluctuations in the overall structure.
Portfolio structure is determined before selecting specific securities. First, asset class and currency allocation is set based on investment horizon and acceptable risk, then instruments are selected within each allocation. The reverse approach—buying what appears attractive and later trying to rationalize it—is the most common mistake of individual investors.
Over time, allocations shift: an appreciating asset class gains more weight than planned, and portfolio risk gradually increases. Restoring original proportions, called rebalancing, is done according to a predetermined rule rather than by feel.
Results should be evaluated for the portfolio as a whole relative to the chosen benchmark. Calculating returns only from winning positions while ignoring others distorts the true picture of your decisions.