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Asset allocation is your plan for investing, the way you organize the investments in your portfolio between stocks, bonds, and cash. In other words, by diversifying your investments across different asset classes (like stocks and bonds, or, better yet, stock funds and bond funds), you could control the risk in your portfolio--and therefore control how much money, on average, you'd lose due to volatility. It turns out that the amounts you buy--whether it's 100 percent stocks or 90 percent stocks and 10 percent bonds--make a profound difference on your returns.

The one thing that bankers hate most is cash: money sitting around in their vaults or on their spreadsheet not being lent in return for interest. But as has hopefully become clear by now, banks become precarious and vulnerable if even a few depositors want their money back all at once. At that point bankers need to have access to something that they can sell in a jiffy so as to pay demanding depositors. Government bonds are perfect for this. To the extent that everyone trusts the government will be true to its word, its bonds will always be in demand. Indeed, they are exceptional in this way - no other debt can be recycled quite as easily. This means that bankers love government bonds: not only is a bond a loan than earns a nice rate of interest very safely (so much so, in fact, that it can also be used as collateral for taking out further loans from other banks), it can also be used as a commodity - a piece of property exactly like a painting or a vintage car that can be sold immediately if the banker is in urgent need of cash. Bonds are, in bankers' parlance, 'the most liquid of assets'. As such, they lubricate the banking system to keep its cogs and wheels turning.

But because bonds are such a safe, low-risk investment, the return--even on a highly rated bond--is much lower than it would be on an excellent stock. Investing in bonds also renders your money illiquid, meaning it's locked away and inaccessible for a set period of time. Technically, you can withdraw early, but you'll face severe penalties, so it's a bad idea.

It is not just big companies that issue bonds, but governments, too, who need money to grow their countries, to build roads, railways, schools, armies. UK government-issued bonds are known as gilts, US government-issued bonds are treasuries. Bonds are also known as 'fixed-income securities', because when you buy one (or lend to a company) you know exactly how much money you are going to get in return for it on maturity: the interest payment or 'yield' is laid out at the beginning of the agreement. If you buy a bond with a value of PS100, a yield of 5 per cent, and a maturity of ten years, you will receive PS5 a year for the next ten years, a total of PS50, on top of your PS100 that you'll get back at the end of it.