The three main asset classes—equities (stocks), fixed-income (bonds), and cash and equivalents—have different levels of risk and return, so each will behave differently over time. Asset allocation involves deciding how much of your portfolio to dedicate to each of these broad categories.
Why It Matters
Asset allocation is widely considered the most important determinant of portfolio performance, more so than the selection of individual securities. Proper allocation ensures your portfolio is diversified, reducing overall risk while pursuing long-term financial goals.