Asset Allocation
How you divide your portfolio across asset classes — stocks, bonds, cash, alternatives — to balance risk and return.
Asset allocation is the strategic decision of how to distribute capital across different asset classes. It is the primary driver of long-term portfolio risk and return — more impactful than individual security selection for most investors.
Classic frameworks like the "60/40 portfolio" split 60% equities and 40% bonds, balancing growth potential against downside protection. Tactical asset allocation shifts these weights based on market conditions; strategic allocation holds them constant.
The right allocation depends on time horizon, risk tolerance, and objectives. Longer time horizons generally support higher equity allocations because there is more time to recover from drawdowns.
Related Terms
Asset
Anything with economic value that can be owned, traded, or used to generate returns — stocks, bonds, currencies, commodities, crypto.
BeginnerBenchmark
A standard index or rate used to evaluate investment performance — the S&P 500 is the most common equity benchmark.
BeginnerDiversification
Spreading capital across uncorrelated assets to reduce risk. When one position falls, others cushion the blow.
BeginnerPortfolio
The complete collection of investments you hold — stocks, bonds, cash, and other assets together.
BeginnerSector
A broad grouping of companies with similar business activities. The S&P 500 uses 11 GICS sectors such as Technology, Financials, and Energy.
Beginner