Asset Allocation
Definition
How you divide your investments across stocks, bonds, cash, and other asset classes. A common allocation is 70% stocks / 20% bonds / 10% cash, or 80/20, or 60/40 depending on your age and risk tolerance. It's the single biggest driver of your investment returns and risk.
Why It Matters
Asset allocation matters more than picking individual stocks. A well-allocated boring portfolio typically beats trying to pick winning stocks. Your age, goals, and how much risk you can stomach should determine allocation.
Example
At 25, try 80% stocks / 20% bonds. At 45, shift to 70/30. At 65, shift to 50/50 or 40/60. Young? You can handle volatility because you have decades to recover. Near retirement? You need stability because you're starting withdrawals.