Asset Allocation
How a portfolio is divided among different asset classes.
What is Asset Allocation?
Asset allocation is the process of dividing a portfolio among different asset classes — typically equities, fixed income, and cash — based on an investor's goals, time horizon, and risk tolerance. Research consistently shows that asset allocation is the primary driver of long-term portfolio performance, accounting for the majority of return variation across portfolios. Strategic asset allocation sets a long-term target mix; tactical allocation allows short-term deviations to capture opportunities.
Example
A common rule of thumb allocates (110 minus your age)% to equities and the rest to bonds. A 40-year-old would hold 70% stocks and 30% bonds under this framework.
Source: CFA Institute — Asset Allocation