Asset Allocation
Definition
The strategy of dividing investments among different asset categories like stocks, bonds, cash, and real estate. Proper asset allocation is the primary driver of portfolio returns and risk management.
Related Terms
Diversification
The strategy of spreading investments across various assets, sectors, and geographies to reduce risk. "Don't put all your eggs in one basket." Diversification can reduce portfolio risk without necessarily reducing expected returns.
Portfolio
The collection of all investments held by an individual or institution. A well-constructed portfolio is diversified across asset classes, sectors, and geographies to balance risk and return.
Rebalancing
The process of realigning portfolio weightings by buying or selling assets to maintain your target asset allocation. If stocks outperform and shift from 60% to 70% of your portfolio, you'd sell stocks and buy bonds to return to 60/40.
Risk Tolerance
An investor's ability and willingness to endure losses in their investment portfolio. Risk tolerance depends on age, income, time horizon, financial goals, and emotional comfort with volatility. Higher risk tolerance = more stocks, lower = more bonds.
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