Asset allocation is the way investment money is divided among groups such as stocks, bonds, and cash.
What it means
Each group behaves differently. Stocks may grow more over long periods but can fall hard. Bonds may move less but still lose value. Cash is steady but can lose buying power to inflation.
The mix should match what the money needs to do and when it will be used. One mix does not fit every account or every person.
A simple example
A 60/30/10 allocation holds 60% in stocks, 30% in bonds, and 10% in cash. On a $500,000 account, that means $300,000 in stocks, $150,000 in bonds, and $50,000 in cash.
If stocks rise much faster than everything else, they might grow to 68% of the account. The portfolio now carries more stock risk than the plan called for. Rebalancing means selling some of what grew or directing new money elsewhere to move the mix back toward 60/30/10. The right mix depends on when the money will be needed and how much loss the plan can handle.
What people often miss
The mix changes when markets move. Rebalancing brings it back toward the chosen plan.
A label such as 'moderate' does not tell you enough. Look at the actual percent in each group.
Three questions worth asking
- What percent is in stocks, bonds, and cash?
- When will I need this money?
- How often will the mix be checked?
Checked against primary sources
This explanation was checked against the sources below. Rules and limits can change, so check the source before making a decision.
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