What is meant by asset allocation?

Asset allocation refers to the strategy of distributing investments among various asset categories, such as stocks, bonds, real estate, and cash. This approach is fundamental in portfolio management as it seeks to optimize the balance between risk and return based on an investor's goals, risk tolerance, and investment horizon.

By diversifying investments across different categories, asset allocation can help minimize risk while maximizing potential returns. Each asset class typically responds differently to market conditions, and spreading investments over multiple classes helps protect the portfolio from significant losses that may arise if one particular asset class performs poorly.

The process of asset allocation also involves periodic rebalancing of the investment mix to ensure it remains aligned with the investor's objectives as market conditions change. This dynamic aspect of managing a portfolio underscores the importance of strategic asset allocation in achieving long-term financial goals.