Thanks for the replies.
I've been slowly reading through
The Intelligent Asset Allocator which is giving me a better idea of the mathematical side of investing, and all of the above makes sense.
Now my challenge seems to be nailing down the side of my portfolio
where it's 'right and doing what's best for me' in terms of taking on risk. What seems to be throwing me off a bit is that it sounds like a properly diversified portfolio has little theoretical risk, just de facto risk in how I'll react to market changes. That being the case I don't see a lot of reason to be overly conservative with stock allocation, and yet I'm still a bit hesitant (probably a good thing).
The other question is how quickly to pay off my house. I get the argument that it's a bad investment, and yet I'm inclined to get it out of the way sooner than later. Maybe not a bad idea to put a little extra down from time to time?
I dunno, maybe when you make enough income over your lifetime all of these points are moot anyway..
The right way to interpret it is that investments are about buying return in exchange for risk. There is the risk-free rate, which is the return you should expect in exchange for zero risk (i.e. a guaranteed return with no variability). Normally, something like the US Treasury rates are used as an approximation to the risk-free rate, under the assumption that the US will not default and there is basically a 100% chance that you will get that return.
Every investment will have a given level of return and a given level of risk (even if those are hard numbers to estimate). Among two investments with the same level of risk, you want the one with the higher return, and among two investments with the same level of return, you want the one with the lowest risk. This is why, for example, putting your money under your mattress is generally a bad investment compared with putting it in risk-free bonds, because even if they have the same risk, bonds give a positive return on investment while your mattress fund does not.
There are a bunch of ways to analyze risk vs return. For example, the
Sharpe ratio gives a basic approximation by dividing the investment's return above the risk-free rate by the risk level (volatility), which gives you an idea of how good of a deal you're getting (are your returns expensive or inexpensive with respect to their increased risk over the risk-free rate). So the Sharpe ratio for short-term US bonds should be about 0, because they give around the risk-free return. A 'mattress fund' would have a negative Sharpe ratio because we are not matching the level of return to the level of risk we are taking on. If we looked at the SP500 right now, we'd see a Sharpe ratio of about 1 (this varies depending on the chosen time interval), so you are buying about 1% of return for each 1% in volatility you take on.
So it's not that index funds are risk-free (they are definitely NOT), it's that you are compensated for taking on that risk with higher returns than the risk-free rate. Most other investments are not risk-free either, and you are shopping for the best return for your desired level of risk. Owning uncorrelated assets is useful because their risks do not directly add, and so decreases the total risk level of the portfolio, so it is generally a good idea to have a diversified portfolio. Index funds are good because they can't be too far off the risk/return curve or they'd be quickly arbitraged back. A portfolio of diversified index funds will get you the best deal (available to the average person) when it comes to trading risk for reward.
The specific allocation that works to give the best risk/return depends on the returns and risk levels of the assets, along with their correlations. Just to give an idea, here are some indexes (and associated Vanguard funds) for data from 1985-2018:
Total Stock Market - VTSMX - Sharpe Ratio 1.217
SP500 - VFINX - Sharpe Ratio 1.254
Total Bond Market - VBMFX - Sharpe Ratio 1.084
You can see that you're getting about 1% return above the risk-free rate for every 1% of risk. You can think of that as the 'market rate' for investment return.
On the other hand, if we take individual stocks over the same time period, you get a wild range of Sharpe ratios, some did well and some did poorly. On average, they got around or below 1% return for every 1% risked, so you might as well lower your volatility (and hence your risk) by taking the same return with less variance and investing in the index funds.
Here's the first few DOW stock's Sharpe ratios:
MMM: 1.178
AXP: 0.776
AAPL: 1.176
BA: 1.422
CAT: 0.769
CVX: 0.627
CSCO: 0.521
KO: 0.815
DIS: 1.003
DWDP: 0.799
GE: 0.294
But since the bulk of my money is in IRA accounts I'll just have to wait it out. When would it be a good time to buy ? Now or wait until it slips even further ? Can't go down to much more, can it ?! 
