What Is Asset Allocation?
Asset allocation is how a portfolio is divided among stocks, bonds, and cash. Why it shapes a portfolio's risk more than any single holding, how the time horizon matters, and how it drifts.
In one sentence
Asset allocation. How a portfolio is divided among asset classes, such as stocks, bonds, and cash.
How it works
Asset allocation means dividing money among broad categories of investments that behave differently. The SEC's beginners' guide names three main ones: stocks, bonds, and cash. It also notes that some financial experts consider allocation the most important investing decision you'll make, even more important than the individual investments you buy.1
Time horizon
Money needed soon can't wait out a fall in the stock market. The same guide notes that a portfolio heavy in stocks would be inappropriate for a short-term goal.1 For money not needed for decades, more in stocks gives more room for growth, with bigger swings along the way.
| Stocks | Bonds | Stocks' share | |
|---|---|---|---|
| Start: 60/40 | $60,000 | $40,000 | 60% |
| After stocks rise 20% and bonds are flat | $72,000 | $40,000 | 64.3% |
Nobody chose 64%. The market did. Rebalancing. Bringing a portfolio back to its intended mix by selling some of what has grown and buying more of what has lagged, or by directing new money. More on this term brings the mix back to the plan.
Learn it properly
- Asset AllocationPart 5: Building a Portfolio
Notes and sources
- Investor.gov, U.S. Securities and Exchange Commission. Beginners' Guide to Asset Allocation, Diversification, and Rebalancing. Checked 2026-09-26. Back to text