Asset Allocation
Definition
The process of dividing investments among different asset classes — stocks, bonds, real estate, commodities, cash — to balance risk and return.
Explanation
Asset allocation is widely considered the most important investment decision. The landmark Brinson, Hood, and Beebower study (1986) found that asset allocation explains over 90% of portfolio return variability over time. Strategic asset allocation sets long-term targets based on goals and risk tolerance. Tactical asset allocation makes short-term adjustments based on market conditions. Most financial advisors recommend starting with asset allocation before selecting individual securities.
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