Asset allocation is the strategy of dividing your investment portfolio among different asset classes, such as stocks, bonds or cash. These three asset classes often have unique characteristics and risk/reward profiles. Subsequently, stocks, bonds and cash tend to have a low correlation to each other, meaning their markets seldom move in the same direction at the same time.
The asset allocation mix you select usually depends upon your risk tolerance and investment time horizon. By investing in more than one asset category, and depending on how much you allocate to each asset class, you can often reduce the risk that you’ll lose money or protect yourself against significant losses.