Definition
How a portfolio is divided among stocks, bonds, and cash. Allocation sets most of your risk and expected return; a common pattern is heavy in stocks while young, shifting toward bonds as the goal approaches.
Why it matters
Decades of research say allocation, not fund picking, drives the large majority of a portfolio's behavior. Choosing a split you can hold through a crash matters more than squeezing out an extra percent in a good year.
Example
A 30-year-old holds 90% stocks and 10% bonds and rides out downturns with decades to recover. At 60, the same investor holds 60/40 so a crash two years before retirement cannot force a delay.
Put it into practice
Related terms
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