Glossary
Asset allocation
How a portfolio is divided among asset classes such as stocks, bonds and cash; the main driver of a portfolio's risk.
On this page
Asset allocation is the decision about what share of a portfolio goes into each broad asset class, such as stocks, bonds, cash and sometimes real estate or commodities. It sets the portfolio's basic risk and return profile far more than the choice of individual securities does, because different asset classes rise and fall at different times and by very different amounts.
How it works
An allocation is usually stated as percentages, for example 60% stocks and 40% bonds. Stocks have historically delivered higher long-run returns with deeper declines; high-quality bonds have returned less but fallen far less in most stock crashes; cash is stable but tends to lose ground to inflation over long periods. Mixing them trades some return for a smoother ride.
What mix suits someone depends on their time horizon, need for the money and ability to tolerate losses without selling. Target-date funds automate a common rule: hold more stocks when retirement is far away and shift toward bonds as it nears.
Keeping the mix
Markets move the weights over time. After a strong stock run, a 60/40 portfolio might drift to 70/30, carrying more risk than intended. Rebalancing, selling some of what grew and buying what lagged, restores the target, either on a calendar or when a weight drifts past a set band.
Allocation is distinct from diversification within an asset class: owning 500 stocks is diversified, but it is still a 100% stock allocation.