What is asset allocation and how does it work?
Asset allocation is a technique used to spread your investment dollars across several asset categories. The investment categories may include cash equivalents, bonds, stocks, real estate, mutual funds, insurance products, or any other investment category imaginable. The general goal is to minimize volatility while maximizing return. The process involves dividing your investment dollars among asset categories that do not all respond to the same market forces in the same way at the same time. Ideally, if your investments in one category are performing poorly, you will have assets in another category that are performing well. The gains in the latter will offset the losses in the former, minimizing the overall effect on your portfolio. The number of asset categories you select for your portfolio and the percentage of portfolio dollars you allocate to each category will depend, in large part, on the size of your portfolio, your tolerance for risk, your investment goals, and your time horizo
