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Asset Allocation

In short

How portfolio is divided among stocks, bonds, cash, and alternatives

Asset allocation is how you divide your money between different types of investments. A classic '60/40' portfolio is 60% stocks, 40% bonds. It's the most important decision in investing — determines most of your long-term returns and risk.

Asset allocation determines portfolio risk and return more than individual security selection. The traditional 60/40 (equities/bonds) has been the institutional standard. Age-based allocation (equity % = 110 minus age) adjusts for time horizon. Factor-based allocation adds alternatives for diversification.

Related concepts

  • Diversification — If you put all your money in one stock and it crashes, you lose everything. Spread it across 20 different stocks, sectors, and even countries — when one falls, others may rise, protecting your overall wealth.
  • Rebalancing — Rebalancing forces you to sell what's risen (expensive) and buy what's fallen (cheap) to restore your target mix. It's systematic discipline — the opposite of the emotional tendency to chase winners.
  • Risk Tolerance — Risk tolerance is how well you can sleep when your portfolio drops 30%. Some investors can stay the course; others panic-sell. High risk tolerance = more stocks. Low risk tolerance = more bonds and defensive assets.
  • Time Horizon — Investing for 30 years? You can weather market crashes because you have time to recover. Investing for 3 years? You need safer investments because a crash could derail your goals. Time horizon is the single biggest factor in portfolio design.