Glossary
Asset Allocation
Asset allocation is the way a portfolio is divided among broad categories of investments — typically stocks, bonds, and cash — to balance expected return against risk.
A portfolio that is 80% stocks and 20% bonds behaves very differently from one split 40/60, regardless of which individual funds fill each slot. Allocation is usually set based on time horizon, goals, and tolerance for decline, then maintained through rebalancing.
Why it matters in practice
Research consistently finds that the allocation decision explains far more of a portfolio's long-run behavior than the selection of individual securities. It is also the main lever for managing how much an account can fall in a bad year — a question worth answering before the bad year arrives, not during it.
Related terms: Diversification · Rebalancing · Risk Tolerance · Time Horizon · Portfolio