What is asset allocation?

Asset allocation—how you divide your money across different types of investments—is one of the most important investment decisions you'll make. It's all about striking the right balance for your financial values and life goals. You want to avoid putting all your eggs in one basket in an attempt to avoid major losses, while still ensuring growth over time.

Understanding the basics of asset allocation can help you grow your wealth without losing sleep at night. Here's an introduction to this essential concept, plus a look at why asset allocation matters and essential strategies to ensure you're getting the most from your investments.

Asset allocation is the process of selecting different types of investments—like stocks, bonds and cash—to build your portfolio. Because different investments react differently to market changes, having a good mix can help you balance your financial priorities with your personal values. The goal is to find the sweet spot between risk and reward based on your timeline, goals and willingness to endure market ups and downs.

Getting your asset allocation right can help smooth out the bumps when markets swing and keep your long-term plan on track. Whether you're aiming for growth, stability or income, your asset allocation is a key part of establishing financial well-being.

Asset allocation is one of the biggest factors in how your portfolio performs over time—not just in terms of returns, but also how much risk you're taking on. If you load up on stocks, you might see faster gains, but you're also signing up for more volatility. On the flip side, if you lean heavily on bonds or cash, your ride may be smoother, but your long-term growth might not be what you're hoping for. The right balance helps you stay invested through the ups and downs of the market without panicking or second-guessing your plan.

It's important to understand that asset allocation looks different for everyone. A 30-year-old saving for retirement likely will need a different setup than someone five years from retirement. Asset allocation helps you dial in the right level of risk at each stage, so your investments can support the life you're building.

Smart asset allocation can help reduce risk in a couple of important ways.

First, adding a range of assets to your portfolio can help you manage volatility in the markets. When the economy experiences a downturn, stocks tend to fall more than most other asset types. But with government bonds or high-quality corporate bonds, the effect tends to be somewhat muted—they may even gain value as people look for safety. Having both can help increase the overall performance of your portfolio as those more conservative investments balance out the others during shifting tides.

Diversification—or spreading your money across multiple securities, and even asset classes—also can help you lessen your exposure to risk. For example, when you own a single stock, there's a chance the company will underperform the market as a whole, or even go under. When you buy an assortment of stocks, however, gains from some of your holdings might offset losses in others. Spreading your investments helps smooth out the bumps and makes your portfolio more resilient over the long haul.

When you're considering which assets to allocate across your portfolio, you're usually looking at three broad asset classes:

Otherwise known as stocks, equity assets represent a stake of ownership in a company. When a company's stocks appreciate in value or when they offer a dividend, your investment grows. Overall, equities offer the potential for growth, but they can be relatively risky and may experience large losses.

With a fixed-income asset, you're essentially entering into a loan with a company or government entity. You lend the issuer money, and in exchange, you receive interest payments over a fixed period of time. This asset class most commonly refers to bonds. These assets tend to be more stable and pay income, and they can act as a stabilizer during volatile times. But bonds also can lose money due to economic conditions or issuer-specific events.

Cash and its equivalents—CDs, money market funds, Treasury bills and notes, and commercial paper—are the most liquid form of investments in your portfolio. This means you can access them more readily than bonds or stocks. Cash can be a safe asset class for the most conservative investors, but it might lose purchasing power over time due to inflation.

There's no one-size-fits-all solution when it comes to building your portfolio—the right mix depends on what you're working toward and how long you have to get there. Here are some of the most important factors influencing asset allocation.

Your risk tolerance plays a huge role in shaping your asset mix. If you're comfortable with short-term market swings, you might lean toward stocks for higher potential returns. But if volatility keeps you up at night, a more conservative portfolio (leaning more heavily on bonds and cash) may help you feel more confident.

A more aggressive investor may opt for a portfolio of 80% stocks and 20% bonds, for instance. But if you're more risk-averse, you may want a substantially higher share of conservative assets.

Are you primarily seeking long-term growth from your investments? Or do you want stable assets that can provide regular income? Your unique financial goals—and the purpose behind them—will affect which types of assets you select for your portfolio.

If you plan to grow your assets for a retirement that's decades away, you'll probably want a more stock-focused asset mix. If you seek a steady income from your investments, however, you should consider interest-bearing bonds or stocks that have historically paid a consistent dividend.

How long you plan to hold your assets—otherwise known as your "time horizon"—is critical when choosing your investments. If you have decades before you need to access your money, you can afford to ride out market dips and lean more heavily on stocks. But if your goal is just a few years away, you'll likely want a more conservative mix to help protect what you've already built.

Consider your financial goals as you look for the right blend of assets. Most portfolios tend to follow one of three asset allocation models:

Growth-based portfolios have a heavier exposure to stocks to maximize potential returns. A portfolio with at least 80% stock holdings represents an aggressive, growth-oriented allocation.

In general, a growth-based portfolio makes the most sense if you have a longer time horizon and can afford to take on greater short-term risk. If you're saving for a retirement that's years away or putting money into a college fund for a young child, for example, maximizing returns is likely your primary objective.

A balanced investment strategy tries to find the sweet spot between growth potential and asset preservation. A roughly even blend of stocks and bonds, such as a 60/40 asset mix, represents a balanced portfolio.

This approach is often suited to investors approaching retirement age, who may need to tap their investment assets in a few years. Even in retirement, having some exposure to stocks may be necessary so your assets last.

An income-based portfolio could include steady, dividend-paying stocks or high-quality bonds that make regular interest payments. Income-based portfolios allocate 70% or more of their assets to bonds and other fixed-income securities.

This strategy can be best for more conservative investors or those getting deeper into retirement, as it offers lower volatility and can provide a stream of income.

Mar 24, 2025

Weighing risk vs. reward

Risk and reward often go hand in hand, especially when it comes to investing. The thought of growing your wealth can be exciting, but more risk could result in a higher chance of loss. Read more about how to understand your risk tolerance so you can make decisions you're comfortable with.

Dive deeper

With your style of investment portfolio in mind, you can dive deeper to land on a specific asset allocation strategy to build and manage your portfolio over time. Your strategy can reflect how much risk you're willing to take, ranging from aggressive to conservative to somewhere in between.

Consider these six common approaches to asset allocation:

Strategic asset allocation is a long-term investing approach that typically stays the course regardless of market events. Over time, you might adjust the holdings to reflect changes in your life—for example, if you prefer to get slightly more conservative each year.

But you're generally not trying to change course dramatically or move to the sidelines temporarily in response to market movements. You may need to rebalance the portfolio periodically to maintain your desired allocations.

The constant-weighting approach keeps a steady mix of stocks, bonds and other assets by rebalancing over time. Say you start with 70% stocks and 30% bonds. If stocks surge, that balance might shift to 80/20. To reset, you'd sell some stocks and buy bonds, keeping your risk in check no matter what the market's doing.

You can rebalance manually at set intervals or when your allocation drifts too far. Or, you can hire a financial advisor to manage it for you, though that typically comes with added fees.

Tactical asset allocation is a more active strategy that may involve frequent changes to your holdings. Hypothetically, when you expect markets to perform well, you might add exposure to stocks or certain sectors. But if you think markets might fall, you might shift funds to cash or bonds.

The success of this strategy depends on your ability to anticipate market movements, which is a difficult task—even for professional fund managers. Because tactical allocation is riskier and involves more transaction fees, it should be approached with caution.

An asset allocation strategy doesn't have to be all or nothing. Like the tactical approach, an integrated model aims to anticipate market shifts to boost returns—but it also factors in your risk tolerance. So, if you're nearing retirement and prefer a balanced portfolio, you wouldn't go all-in on stocks, even if you expect a bull market. Instead, you might make smaller tweaks or shift into sectors expected to do well in the short term.

While generally less risky than a tactical strategy, the integrated approach has a similar drawback: Most investors struggle to beat the market. Trying to time short-term moves can add fees and leave you overexposed to one sector or region.

An insured asset allocation strategy typically attempts to maximize returns through active portfolio management but adds a safety mechanism. If your portfolio falls below a certain "floor" value, you purchase lower-risk assets to avoid further losses.

While the idea of minimizing risk is an attractive one, these interventions can do unexpected long-term harm. Asset classes that take a temporary hit are often the fastest ones to bounce back when market conditions change. By selling off assets when they're down, you may handicap your ability to get back to where you were—or go higher.

Dynamic asset allocation is another active way to manage your portfolio. Rather than trying to guess what the market might do, however, a dynamic allocation seeks to purchase securities that are undervalued by historical standards. The central premise is that, over the long run, an asset or asset class selling at an attractive price tends to rise faster than those selling at higher valuations.

Several companies offer mutual funds that utilize this approach. Because they're actively managed, they tend to impose higher fees than passively traded funds, which can weigh down performance. If you're considering a dynamic fund, review the typical asset mix with the fund to understand how it may fit into your portfolio.

As an investor, your asset allocation approach should be a strategy designed to work toward a desired return that aligns with your risk appetite. It is a crucial tool that can help you navigate market uncertainty and help achieve your financial goals.

To find out which asset allocation strategies are best for you, speak with a financial advisor, who can help design a portfolio tailored to your specific needs.