Asset allocation

How a portfolio is divided among broad investment types such as stocks, bonds and cash, chosen to balance growth potential against risk.

What it means

Asset allocation is the big-picture mix of a portfolio, usually described as percentages, such as 60% stocks and 40% bonds. Stocks have historically offered more growth with bigger swings, bonds more stability with less growth, and cash the most stability with the least growth. The mix often has a larger effect on a portfolio’s overall ups and downs than the specific funds chosen.

A suitable allocation depends on time horizon, goals, other income and risk tolerance. Many people hold more stocks when goals are far away and shift toward bonds and cash as they near the point of spending the money. Over time, market moves pull a portfolio away from its target, which is why rebalancing exists.

Example

Suppose someone with $50,000 chooses a 60/40 allocation. They would hold $30,000 in stock funds and $20,000 in bond funds.

How it’s used

Setting up a retirement or long-term investment portfolio
Adjusting risk as a goal gets closer
Choosing between funds such as target-date or balanced funds

Strengths and weaknesses

Strengths

Provides a clear plan that matches risk to goals
Reduces the urge to react to short-term market moves
Combining assets that behave differently can smooth results

Weaknesses

No allocation prevents losses in every market
A conservative mix may grow too slowly to meet goals
Requires periodic rebalancing to stay on target

Educational information only, not financial, tax or legal advice. Rules, limits and rates change; check the IRS, your lender or plan, or a qualified professional before acting.