What is meant by "asset allocation"?

Asset allocation refers to the process of dividing investments among different asset categories, such as stocks, bonds, real estate, and cash. This approach is fundamental to investment management as it helps in balancing risk and reward according to an individual's specific financial goals, risk tolerance, and time horizon.

By diversifying investments across various asset classes, an investor can mitigate the impact of a poor-performing asset on their overall portfolio. For instance, if stocks are underperforming, bonds or other asset classes may still provide returns or stability, thereby protecting the investment portfolio. Asset allocation is strategically important for individuals to achieve long-term financial objectives while managing potential market risks.

The focus on diversification inherent in asset allocation enables investors to optimize their returns relative to the risks they are willing to accept, leading to a more resilient investment strategy.