Asset allocation is the strategy of dividing investments across different asset classes such as stocks, bonds, real estate, or crypto to balance risk and reward. Proper allocation reduces exposure to any single market downturn and aligns with an investor’s goals, time horizon, and risk tolerance. Proper allocation requires periodic portfolio rebalancing to maintain target percentages as different assets perform differently over time.
Example:
An investor allocates 60% to stocks, 30% to bonds, and 10% to Bitcoin. If stocks fall, the portfolio is cushioned by bonds and crypto exposure.