What is Asset Allocation?
is the process of deciding how to split your between different categories of investment typically , , and cash. It is distinct from which specific investments you choose. is about the mix of types, not the individual picks within each type.
Why does matter so much?
Research consistently shows that is responsible for the majority of a 's long-term performance and risk profile. Getting the right mix for your situation matters more than picking the right individual or funds within each category.
What are the main asset classes?
, also called equities offer higher potential returns over the long term but come with more . offer lower but more predictable returns and tend to be more stable. are the most stable of all but offer the lowest returns and are slowly eroded by . Some investors also include real estate, commodities, or alternative assets.
How do you decide on the right allocation?
Your time horizon and are the two main factors. A younger investor with decades ahead of them and a high might hold 90% and 10% . An investor approaching retirement might shift toward 50% and 50% 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 do this automatically, gradually adjusting the allocation as you approach a set retirement year.