Definition of Asset Allocation

What does the term "asset allocation" mean? What is the definition of the term "asset allocation"?

In investing, "asset allocation" is how you choose to spread around your capital.

For instance - let's say that you are 30 years of age and have $100,000 in cash in your savings account. You look at the strong performance of the markets and decide that you want in, so you go to visit a professional money manager.

The money manager decides that you should have a higher tolerance for risk due to your relatively young age, so he suggests this mix:

75% Mutual Funds
15% Bonds
10% Cash

In addition, the money manager also recommends that you expose yourself to different markets with your mutual fund purchases. He suggests this mix for your mutual fund holdings:

50% North America
25% Asia
25% Emerging Markets

This is asset allocation - you are looking to spread around your assets in a way that maximizes your potential returns while minimizing your risk.

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