Asset Allocation
Definition
Asset allocation is the strategy of dividing investments among different asset categories like stocks, bonds, and cash to balance risk and reward.
Explanation
Asset allocation is the most important determinant of long-term investment returns. The three main asset classes are equities (stocks), fixed income (bonds), and cash equivalents. Each has different risk and return characteristics. The right mix depends on your goals, timeline, and risk tolerance.
A common rule of thumb: subtract your age from 110 for the percentage to allocate to stocks. A 30-year-old would hold 80% stocks, while a 60-year-old would hold 50% stocks.
Example
A conservative allocation for a 60-year-old: 40% stocks, 50% bonds, 10% cash. An aggressive allocation for a 30-year-old: 80% stocks, 15% bonds, 5% cash.