Asset Allocation
The strategy of dividing investments among different asset categories like stocks, bonds, and cash.
Definition
Asset allocation is an investment strategy that aims to balance risk and reward by distributing a portfolio's assets according to an individual's goals, risk tolerance, and investment horizon. The three main asset classes are equities (stocks), fixed-income (bonds), and cash equivalents. A common rule of thumb is to subtract your age from 110 to determine your stock allocation percentage (e.g., a 30-year-old would hold 80% stocks, 20% bonds). Studies show that asset allocation accounts for over 90% of portfolio return variability. Rebalancing periodically ensures your allocation stays aligned with your target as market movements shift the proportions.
Related Terms
Diversification
Spreading investments across various assets to reduce risk.
TradingRisk Management
The process of identifying, assessing, and controlling threats to an investment portfolio.
InvestingRebalancing
The process of realigning portfolio weightings by periodically buying or selling assets to maintain target allocation.