KEY TAKEAWAYS
- Asset allocation divides a portfolio among broad investment categories such as stocks, bonds, and cash.
- The mix should follow the goal, time horizon, liquidity need, and capacity for loss, not a forecast about the next quarter.
- Diversification happens inside and across asset classes; it does not eliminate market risk.
- Write an allocation range before selecting individual securities so product choices serve the plan.
Define the purpose and time horizon
Separate long-horizon growth goals from money needed soon. A portfolio that must fund a near-term expense cannot take the same loss and recovery risk as money with decades to compound.
Give each asset class a job
Stocks can provide long-term growth but can decline sharply. Bonds can provide income and diversification but carry interest-rate and credit risk. Cash supports liquidity and stability but may lose purchasing power over time.
Choose ranges instead of pretending to know the perfect number
A practical policy can use target ranges that tolerate normal market movement while defining when a review or rebalance is warranted.
Evaluate the portfolio as one system
A holding that looks conservative by itself can still increase concentration when combined with the rest of the portfolio. Measure the total mix, not only the label on each product.