The process of dividing investments among different asset categories such as stocks, bonds, and cash.
Asset allocation is an investment strategy that aims to balance risk and reward by apportioning a portfolio's assets according to an individual's goals, risk tolerance, and investment horizon. The three main asset classes—equities, fixed-income, and cash and equivalents—have different levels of risk and return, so each will behave differently over time. There is no simple formula that can find the right asset allocation for every individual, but most financial experts agree that asset allocation is one of the most important decisions investors make.
A conservative investor near retirement might choose an allocation of 40% stocks, 50% bonds, and 10% cash, while an aggressive young investor might opt for 80% stocks, 15% bonds, and 5% cash.