Glossary

Asset allocation

The decision of how to split an investment portfolio across asset classes such as stocks, bonds, and cash.

Asset allocation is the process of dividing a portfolio across broad asset classes, typically equities, fixed income, cash, and sometimes alternatives like real estate or commodities, based on an investor's goals, time horizon, and tolerance for risk. It is widely cited as one of the largest drivers of a portfolio's long-run risk and return, ahead of individual security selection.

A strategic asset allocation sets long-term target weights for each asset class, while a tactical allocation makes shorter-term tilts away from those targets based on a market view. Over time, gains and losses in different assets cause actual weights to drift from the targets set during allocation, which is corrected through portfolio rebalancing. Allocation decisions are usually informed by risk profiling, which assesses how much volatility an investor can tolerate financially and psychologically.

Advisors and investors use asset allocation as the primary tool for matching a portfolio to an investor's circumstances, and it underlies model portfolios, target-date funds, and robo-advisor recommendations. A common pitfall is setting an allocation based on risk tolerance alone while ignoring time horizon and required return, or abandoning a long-term allocation during a downturn, which locks in losses and undermines the diversification the allocation was designed to provide.

Last reviewed September 22, 2026

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Related terms

Portfolio rebalancing Buying and selling holdings to bring a portfolio's asset weights back to its target allocation after they drift. Risk profiling Assessing an investor's ability and willingness to tolerate investment losses, used to guide asset allocation decisions. Benchmark index A market index used as the reference point for judging whether a portfolio or fund's performance and risk are competitive. Dollar-cost averaging (DCA) Investing a fixed amount at regular intervals regardless of price, buying more shares when prices are low and fewer when high. Sharpe ratio A measure of risk-adjusted return: excess return earned per unit of total volatility taken on.

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