Asset Allocation
The strategy of dividing investments among different asset classes — stocks, bonds, real estate, cash — to balance risk and return according to your goals and risk tolerance.
Asset allocation is the most important investment decision you make, responsible for roughly 90% of portfolio return variability according to financial research. Young investors with a long time horizon can typically hold more stocks (80–100%), while those nearing retirement shift toward bonds and cash for stability. Common models include age-based allocation (110 minus your age = stock percentage), target-date funds that rebalance automatically, and the three-fund portfolio (domestic stocks, international stocks, bonds). The right allocation depends on your time horizon, risk tolerance, and financial goals.
Example
A 30-year-old might allocate 80% stocks (40% domestic, 30% international, 10% emerging), 10% bonds, and 10% REITs. At 55, this might shift to 50% stocks, 35% bonds, 15% cash.
Related terms
Diversification
The practice of spreading investments across different assets, sectors, and geographies to reduce the impact of any single investment's poor performance.
Portfolio Rebalancing
The process of realigning portfolio weights back to a target allocation by selling overweight assets and buying underweight ones.
ETF (Exchange-Traded Fund)
A fund that holds a basket of assets (stocks, bonds, or commodities) and trades on a stock exchange like an individual stock.
Net Worth
The total value of all your assets (cash, investments, property) minus all liabilities (loans, mortgages, credit card debt).