Asset Allocation
The strategy of dividing an investment portfolio among different asset categories such as stocks, bonds, and cash. It is widely considered the most important determinant of long-term portfolio performance.
Asset allocation is the process of deciding what percentage of your portfolio to invest in each asset class. Research by Brinson, Hood, and Beebower famously concluded that asset allocation explains over 90% of the variation in a portfolio's returns over time, making it far more impactful than individual security selection.
Common Approaches
- Strategic allocation — Setting a long-term target mix (e.g., 60% stocks, 30% bonds, 10% alternatives) and rebalancing periodically
- Tactical allocation — Temporarily deviating from targets to capitalize on short-term opportunities
- Dynamic allocation — Shifting the mix as economic or market conditions change
Your ideal allocation depends on your time horizon, financial goals, and risk tolerance. Younger investors with long time horizons often allocate more heavily to equities, while those approaching retirement may shift toward bonds and cash. For a comprehensive framework, read our asset allocation guide.