Asset Allocation Basics
Asset allocation is the process of deciding how much of a portfolio belongs in broad categories such as stocks, bonds, and cash.
The role of each asset
Stocks
Stocks provide ownership in businesses and historically have offered higher long-term growth potential, with substantial short-term volatility.
Bonds
Bonds are debt instruments. They may provide income and lower volatility than stocks, but they carry interest-rate, inflation, and credit risk.
Cash
Cash and cash equivalents support near-term spending and stability, but purchasing power can erode over long periods.
Time horizon and risk capacity
Money needed soon generally has less capacity to absorb market declines. Long-term goals may tolerate more volatility, provided the investor can stay disciplined.
Rebalancing
Rebalancing restores a target allocation after market movement. It is a risk-control process, not a prediction about which asset will perform best next.