Asset allocation

Asset allocation is the process of deciding how to split a portfolio across broad categories of investments, typically stocks, bonds, and cash, based on an investor's goals, time horizon, and risk tolerance. It is one of the biggest drivers of a portfolio's overall risk and return, often more so than which individual stocks are picked.

A younger investor with decades until retirement can typically afford an allocation weighted more heavily toward stocks, since there is time to ride out downturns. An investor closer to needing the money usually shifts toward a larger allocation to bonds and cash, trading some growth potential for stability. Target date funds automate this shift over time.