Asset allocation is the process of dividing an investment portfolio among different asset classes such as stocks, bonds, cash, and real estate to balance risk and reward based on an individual’s goals, risk tolerance, and time horizon.
The idea is to diversify holdings so that gains in one asset class can offset losses in another, helping to reduce overall portfolio volatility.
Strategic asset allocation maintains a long-term target mix, while tactical allocation allows for short-term adjustments based on market conditions.
Proper asset allocation is crucial to building a strong financial strategy, as it significantly impacts long-term returns and helps protect against market fluctuations and unforeseen economic events.