asset allocation
An investment strategy that divides a portfolio among different asset categories — such as stocks, bonds, and cash — to balance risk and reward based on goals and time horizon.
Example
“Her financial advisor recommended a 60/40 asset allocation — 60% stocks and 40% bonds — for moderate risk tolerance.”
Memory Tip
Asset allocation = deciding how to ALLOCATE (assign) your assets across categories.
Why It Matters
Asset allocation is crucial because it directly impacts how much risk you take on and how much money you can potentially earn. By spreading your investments across different types of assets, you reduce the chance that a single market downturn will devastate your entire portfolio.
Common Misconception
Many people mistakenly believe that asset allocation means picking individual stocks and bonds carefully. In reality, asset allocation is about deciding what percentage of your total money goes into broad categories like stocks versus bonds, not about picking specific investments within those categories.
In Practice
A 35-year-old with 30 years until retirement might allocate 80 percent to stocks, 15 percent to bonds, and 5 percent to cash. If they have a $100,000 portfolio, that means $80,000 in stocks, $15,000 in bonds, and $5,000 in cash, which gives them growth potential while still having some protection against market volatility.
Etymology
From Latin 'assets' (sufficient) + 'allocare' (to assign, place).
Common Misspellings
Start investing with no commission trades
Related Terms
More in investing
Other investing terms you should know
Need help with spelling?
Instant spelling checker with dialect variants for 2,000+ words.