Asset Allocation & Diversification

Asset allocation is a fundamental investing strategy for spreading your principal across broad categories of securities, such as stocks, bonds and cash or cash equivalents. The goal is to benefit from strong returns in various asset classes while protecting your portfolio against a downturn in any single class.

You'll also want to apply a related strategy, called diversification, to help enhance return and offset risk in each asset class to create a net effect. For example, when you diversify the stock segment of your portfolio, you include shares in companies of different sizes, or market capitalizations, as well as in companies that operate in various sectors of the economy.

Time to Rebalance

As soon as you begin to invest, your asset allocation will start to shift in response to changes in the market. This means that your portfolio may become more aggressive or conservative than you'd like. In response, you may need to occasionally rebalance, or realign, your portfolio to maintain the asset allocation you've selected.