Asset allocation is the way an investment portfolio is divided across the major asset classes — typically stocks, bonds, cash, property and alternatives. It is the primary driver of a portfolio's long-term risk and return, more so than the choice of individual securities within each class.
Worked example
A growth-oriented investor might hold 80% stocks and 20% bonds, while someone near retirement might hold 40% stocks, 50% bonds and 10% cash to reduce volatility.
Why it matters
Because allocation drives most of a portfolio's behaviour, getting the mix right for your time horizon and risk tolerance matters more than picking winning stocks. Allocations drift as markets move, which is why periodic rebalancing is needed.
Frequently asked questions
It depends on your goals, time horizon and tolerance for volatility. A longer horizon generally supports a higher stock weighting; a shorter one favours more bonds and cash.