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Asset Allocation

Asset allocation is an investment strategy that involves dividing a portfolio’s investments among different asset classes, such as stocks, bonds, and cash, to balance risk and reward according to an investor’s goals, time horizon, and risk tolerance. The idea is to optimize the risk-return profile of a portfolio by spreading investments across various asset types, which typically perform differently under different market conditions. By diversifying investments, asset allocation helps to reduce the impact of volatility and market fluctuations on the overall portfolio, providing a more stable return over time.

Example

A conservative investor might allocate 60% of their portfolio to bonds, 30% to stocks, and 10% to cash, focusing on stability and income rather than high returns.

Key points

• An investment strategy of spreading investments across different asset classes.

• Balances risk and reward based on goals, time horizon, and risk tolerance.

• Helps reduce portfolio volatility by diversifying investments.

Quick Answers to Curious Questions

It helps manage risk and provides a more stable return by diversifying investments across different asset classes that behave differently under various market conditions.

Asset allocation may be adjusted as market conditions, personal financial situations, or life stages change, to maintain the desired balance of risk and return.

Factors include the investor’s financial goals, time horizon, risk tolerance, and current market conditions.