What Is Asset Allocation?
How you divide your portfolio across stocks, bonds, cash, and other assets.
The Full Definition
Asset allocation is the decision of how to divide your investment portfolio among different asset categories — most commonly stocks, bonds, and cash. Your allocation determines the majority of your portfolio's risk and return characteristics. A classic rule of thumb is to subtract your age from 110 to get your stock percentage (so a 30-year-old holds 80% stocks), but your personal risk tolerance, time horizon, and financial goals should drive the actual decision.
Real-World Example
A 35-year-old saving for retirement 30 years away might hold 90% stocks and 10% bonds — an aggressive allocation that accepts short-term volatility for higher long-term growth. A 60-year-old nearing retirement might flip to 50/50 to protect against a market crash right before they need the money.