What Is Asset Allocation?
Asset allocation means dividing your investment money into different types of assets based on your goals and risk level.
The goal:
To balance risk and reward by spreading your money across different investments.
Common Asset Classes
| Asset Type | What It Is | Risk Level |
|---|---|---|
| Stocks | Ownership in companies | High |
| Bonds | Loans to companies or governments | Low–Medium |
| Cash | Savings or money market funds | Very low |
| Real estate | Property or REITs | Medium |
| Crypto | Digital assets like Bitcoin | Very high |
Example of Asset Allocation
Suppose you have $10,000 to invest. A common allocation for a balanced investor might look like:
- 60% Stocks → $6,000
- 30% Bonds → $3,000
- 10% Cash → $1,000
This mix depends on your age, goals, and risk tolerance.
What Is Portfolio Rebalancing?
Rebalancing means adjusting your investments back to your target allocation when market changes throw it off.
Example of Rebalancing:
Let's say your original plan was:
- 60% Stocks
- 30% Bonds
- 10% Cash
But after 1 year, your stocks did very well and now your portfolio looks like:
- 70% Stocks
- 25% Bonds
- 5% Cash
Rebalancing refers to adjusting a portfolio back to its original target allocation after market movements have shifted the weights — typically by trimming assets that have grown and adding to assets that have shrunk.
How Often to Rebalance?
- Once or twice a year (e.g. every 6 or 12 months)
- Or whenever your allocations shift too far from target (e.g. by 5% or more)
Characteristics of Asset Allocation & Rebalancing
| Characteristic | Mechanism |
|---|---|
| Concentration management | Limits the portion of the portfolio exposed to a single asset class |
| Allocation stability | Maintains target weights over multi-year horizons despite market movement |
| Mechanical contrarianism | By restoring weights, trims outperforming assets and adds to underperforming ones |
| Time-horizon flexibility | Target allocations can be updated as investor circumstances change |
Summary
| Concept | What It Means |
|---|---|
| Asset Allocation | Choosing how much to invest in each asset type |
| Portfolio Rebalancing | Adjusting your investments to stay on target |
| Why It Matters | Controls risk, supports long-term growth |