What does "asset allocation" mean?

The concept of "asset allocation" refers to the strategic distribution of investments across various asset categories, such as stocks, bonds, real estate, and cash. This strategy is vital because it helps investors manage risk and optimize potential returns based on their financial goals, risk tolerance, and investment horizon. By diversifying investments among different asset classes, investors can reduce the negative impact that any single investment's performance may have on their overall portfolio.

For example, in a well-allocated portfolio, if one asset category underperforms, others may perform better, balancing the overall risk and return. Therefore, understanding asset allocation is crucial for developing a robust investment strategy that aims to meet long-term financial objectives, particularly in the context of retirement savings.