Asset Allocation
Definition
An investment strategy that balances risk and reward by distributing portfolio assets among different categories like stocks, bonds, and cash.
Asset allocation is the practice of dividing an investment portfolio among different asset classes such as stocks, bonds, real estate, and cash equivalents. The goal is to optimize the balance between risk and return based on an individual's goals, risk tolerance, and time horizon.
A common rule of thumb is to subtract your age from 110 to determine the percentage of your portfolio that should be in stocks, with the rest in bonds and cash. A 30-year-old might hold 80% stocks and 20% bonds, while a 60-year-old might hold 50% stocks and 50% bonds.
Studies have shown that asset allocation is responsible for over 90% of a portfolio's return variability over time. Rebalancing periodically to maintain your target allocation ensures you are consistently buying low and selling high across asset classes.
Related Calculators
Related Terms
Diversification
financeAn investment strategy that reduces risk by spreading investments across different asset classes, industries, and geographic regions.
Portfolio
financeA collection of financial investments such as stocks, bonds, commodities, cash, and cash equivalents held by an individual or institution.
Securities
financeTradable financial instruments including stocks, bonds, and options that represent ownership, debt, or the right to buy or sell an underlying asset.
Mutual Fund
financeAn investment vehicle that pools money from many investors to purchase a diversified portfolio of stocks, bonds, or other securities.
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