What does asset allocation refer to?

Asset allocation refers to the distribution of investments across various categories of assets, such as stocks, bonds, cash equivalents, and other securities. This strategy is fundamental to building a diversified portfolio, which helps manage risk and optimize returns over time. By diversifying across multiple asset classes, investors can mitigate the impact of poor performance in one area by balancing it with gains in another.

This approach allows investors to tailor their portfolios according to their investment goals, risk tolerance, and time horizon. A well-thought-out asset allocation can help achieve a desired risk level while still aiming for growth and income.

Other strategies, such as investing solely in a single asset class or focusing only on market timing or specific securities, do not employ the broad-based diversification that asset allocation promotes. These strategies often expose investors to higher levels of risk and can lead to less stable returns over the long term.