Definition
Asset Allocation
Asset allocation is the decision of how to divide your portfolio among major asset classes — such as equity, debt, gold and cash — based on your goals, horizon and risk tolerance.
It is widely regarded as the single biggest driver of long-term returns and risk, more important than picking individual stocks or funds. A young investor with a long horizon might hold a high equity allocation; someone near a goal shifts toward debt and cash via a glide path. Periodic rebalancing keeps the mix on target as markets move.
Good asset allocation links your portfolio to your life — your goals, time frames and ability to tolerate volatility — and provides a disciplined framework that resists emotional, biased decisions. Getting the allocation right matters far more than chasing the latest hot fund.
Related terms
- Glide PathA glide path is a planned, gradual shift in your asset allocation from higher-risk to lower-risk investments as you approach a financial goal or retirement date.
- Life-Cycle InvestingLife-cycle investing is the idea of adjusting your asset allocation and risk over the course of your life, taking more risk when young and less as you age.
- DiversificationDiversification is spreading investments across different assets, sectors and geographies so that poor performance in one does not sink your whole portfolio.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.