What is Asset Allocation?

Asset allocation is the process of deciding how to split your portfolio between different categories of investment typically stocks, bonds, and cash. It is distinct from which specific investments you choose. Asset allocation is about the mix of types, not the individual picks within each type.

Why does asset allocation matter so much?

Research consistently shows that asset allocation is responsible for the majority of a portfolio's long-term performance and risk profile. Getting the right mix for your situation matters more than picking the right individual stocks or funds within each category.

What are the main asset classes?

Stocks, also called equities offer higher potential returns over the long term but come with more volatility. Bonds offer lower but more predictable returns and tend to be more stable. Cash and cash equivalents are the most stable of all but offer the lowest returns and are slowly eroded by inflation. Some investors also include real estate, commodities, or alternative assets.

How do you decide on the right allocation?

Your time horizon and risk tolerance are the two main factors. A younger investor with decades ahead of them and a high risk tolerance might hold 90% stocks and 10% bonds. An investor approaching retirement might shift toward 50% stocks and 50% bonds to protect what they have built. These are not rules, they are starting points for thinking about what fits your situation.

Does allocation change over time?

It should. As you get closer to needing your money, it generally makes sense to shift toward more conservative assets. Some funds called target date funds do this automatically, gradually adjusting the allocation as you approach a set retirement year.