What is the purpose of asset allocation?

Asset allocation refers to the strategy of distributing investments among different asset categories, such as stocks, bonds, real estate, cash, and other options. The primary goal of this approach is to balance risk and reward within an investment portfolio. By diversifying investments across various categories, investors can reduce the impact of volatility in any single investment.

This strategy allows individuals to tailor their investment approach to their specific financial goals, risk tolerance, and investment time horizon. For example, a younger investor with a long time horizon may allocate more toward stocks for greater growth potential, while an older investor might prefer bonds for stability and income.

The focus on spreading investments is essential for managing risk effectively. When an asset class underperforms, others may outperform, helping to stabilize overall portfolio returns. This strategy is widely recognized as a fundamental principle of sound investing and is crucial for achieving long-term financial objectives.