Asset allocation is a strategy that involves dividing an investment portfolio among different asset classes, such as stocks, bonds, and cash. The goal of asset allocation is to balance risk and reward by investing in a mix of assets that aligns with an investor’s goals, risk tolerance, and investment horizon.
Different asset classes have varying levels of risk and return, so by diversifying a portfolio across multiple asset classes, investors can potentially reduce the overall risk of their investments. For example, stocks are generally considered riskier than bonds, but they also have the potential for higher returns.
By allocating a portion of their portfolio to bonds, an investor can potentially reduce their overall risk while still achieving some growth. There are many different asset allocation strategies, and the right approach will depend on an investor’s individual circumstances and goals.
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