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Finance Dictionary and Glossary of Investment Terms
The process of dividing a portfolio among major asset categories, such as bonds, stocks, or cash. The purpose of asset allocation is to reduce risk by diversifying the portfolio.
The process of dividing investments among different kinds of assets, such as stocks, bonds, real estate and cash, to optimize the risk/reward tradeoff based on an individual's or institution's specific situation and goals. A key concept in financial planning and money management.
An investment strategy where you decide what percentage of your investment portfolio should go into stocks, bonds, or other asset classes. After you set up your portfolio based on your asset allocation strategy, adjust your holdings on a regular basis to maintain these percentages. Your decision in this respect is perhaps the single biggest factor that will determine your long-term investment outcome, so make it carefully. The asset allocation model you choose should be based on how much risk you are willing to take.