Asset
allocation is a strategy for building and managing your
investment portfolio.
You allocate your assets by deciding how much of your principal
to invest in different asset
classes,
or investment categories. For example, you might
invest some of your money in stocks, some in bonds, and some in
cash or cash equivalents. The allocation you choose has a major
impact on your investment return,
and on the level of risk you take as an investor.
Asset allocation determines the investment
returns you achieve because different asset classes — stocks,
bonds, and cash equivalents — typically react differently
to changes in the financial markets and to broader economic conditions.
For example, a market that produces strong stock returns may cause
bond returns to slump, and vice versa. But, if you spread your
investments across different asset classes, you may be able to
limit, or offset, potential losses in one asset class with stable
values, or even gains, in another.
Choosing the specific asset classes you’ll
include in your portfolio is the first step. Next, you have to
consider what percentage of your total portfolio you want to allocate
to each of those classes.
