Asset allocation
Also called: investment mix, portfolio allocation
Asset allocation is how you divide an investment portfolio among broad categories of assets, such as stocks, bonds, and cash, based on your goal, how long until you need the money, and how much risk you can accept.
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How it works
The categories tend to react differently to the same events, so a stretch that hurts one can leave another steady or even help it. Investments with bigger price swings generally carry the potential for higher returns in exchange for that risk. Your mix sets how much short-term movement you are signing up for and how much growth the portfolio is aiming for.
Two personal factors usually shape the choice. Your time horizon is how many months, years, or decades remain until you need the money; people with longer horizons may be more comfortable holding volatile investments. Your risk tolerance is your ability and willingness to see the balance fall in exchange for potentially higher returns. The right mix can change as those factors change, and a target date fund is typically designed to grow more conservative as its target year approaches.
Market moves shift your percentages over time. Rebalancing brings the mix back to its target by selling some of what grew, buying more of what lagged, or steering new contributions toward the category that fell behind. Some investors rebalance on a calendar schedule, others when a category moves past a set threshold; a sale can also trigger trading costs or taxes worth checking first.
Related terms
Sources and further reading
Examples are illustrative and focus on U.S. personal finance. This page is educational, not individual financial, investment, tax, or legal advice. Read our editorial approach or report a correction.