Written by Asset allocation refers to the process of deciding how to distribute your investments across different asset classes (such as stocks, bonds, real estate, and cash) based on your financial goals, risk tolerance, and investment time horizon. Asset allocation is one of the most important factors in determining your portfolio’s overall risk and return profile.
For example, a young investor with a long-term horizon and high risk tolerance may allocate a larger portion of their portfolio to stocks, which have higher growth potential but also higher volatility. An investor closer to retirement might choose a more conservative allocation, with more bonds or other low-risk assets to preserve capital and generate stable income.
The key to asset allocation is balancing risk and return, and adjusting your allocation as your circumstances change. Rebalancing your portfolio periodically is also important to ensure that it remains aligned with your goals and risk tolerance.
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