Define "asset allocation".

Asset allocation refers to the strategic distribution of investments among different asset categories, such as stocks, bonds, real estate, and cash. The reason this approach is so important is that it helps to manage risk while aiming to maximize returns over time. By diversifying investments across various asset classes, an individual can reduce the impact of any single investment's poor performance on their overall portfolio.

For instance, if the stock market experiences a downturn, bonds might provide a stabilizing effect, thereby cushioning the overall portfolio from significant losses. This strategy acknowledges the inherent risks associated with different types of investments and seeks to balance those risks with the potential for growth, ultimately aligning with the investor's financial goals and risk tolerance.

This understanding underlines why optimal asset allocation is a cornerstone of effective investment strategy in retirement savings, as it can significantly affect long-term wealth accumulation and financial security in retirement.