Asset allocation is an investment strategy that aims to balance risk and reward by apportioning a portfolio’s assets according to an individual’s goals, risk tolerance, and investment horizon. The three main asset classes - equities, fixed-income, and cash and equivalents - have different levels of risk and return, so each will behave differently over time.
Key Takeaways
- Asset allocation involves dividing an investment portfolio among different asset categories, such as stocks, bonds, and cash.
- The process of determining which mix of assets to hold in your portfolio is a very personal one.
- The asset allocation that works best for you at any given point in your life will depend largely on your time horizon and your ability to tolerate risk.
Why It Matters
Because different asset classes have different risks and potential returns, they rarely move in the same direction at the same time. By investing in more than one asset class, you’ll reduce the risk that you’ll lose money and your portfolio’s overall investment returns will have a smoother ride.