A tale of eggs and baskets.
Asset allocation is one of those investment concepts that sounds a lot more complicated than it actually is.
Intuitively, it makes sense that certain investments do better in certain market conditions than others. Under some circumstances, stocks soar while bonds founder. Conversely, there are times when bonds are booming and stocks wallow.
Obviously being too heavily invested in any on asset class would set you up for a ride on the investment roller coaster. And there are very few investors who enjoy that trip.
Asset allocation is a strategy that says you should spread your investments among different asset classes so your money is poised to take advantage of the “booming” sectors, while protecting you from heavy losses.
The simplest allocation models are broken into Stocks/Bonds/Cash. Although there are many levels within each of those as well that will determine just how your money is divided.
Asset allocation differs from regular diversification in that you can be “diversified” if you have a stock portfolio with many different stocks; however, you’re not protected if the market takes a dip. Asset allocation takes diversification to the next level ensuring that you’re diversified across multiple “classes” of assets.
Your financial professional will look at your current investments, talk to you about your ability to take on risk and your time horizon, and then help you create an allocated portfolio that best suits your situation.