You’ve got stocks, You’ve got bonds. How do they fit into your portfolio? That’s asset allocation.
Or, you can think of it as a way to describe the contents of your portfolio.
What is asset allocation?
Asset allocation is the process of dividing the investments in your portfolio into different asset classes. These classes include stocks, bonds, cash, mutual funds, exchange-traded funds (ETFs), and more.
Essentially, the term refers to the particular mix of investments you own, and you can calculate the allocation out to get an idea of how diversified your portfolio is.
For example, if you have $5,000 in stocks and $5,000 in bonds, your portfolio’s asset allocation is 50/50, or 50% stock and 50% bonds.
Asset allocation vs. rebalancing
Asset allocation is closely associated and sometimes used interchangeably with the term “rebalancing”. While they are somewhat the same, rebalancing is an action typically carried out after an initial allocation mix has been enacted.
For example, say you built your portfolio to your desired specifications. But, over time, your mix becomes skewed—if you started with 50/50 stocks to bonds and it’s now 60/40 as you’ve purchased additional stocks, you can consider rebalancing.
Or, make moves (buying additional bonds, selling stocks, etc.) to return to your original allocation mix.
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