Asset Allocation

Asset allocation is the split of a portfolio across asset classes, stocks, bonds, cash, and sometimes real estate or commodities, expressed as target percentages like the classic 60/40 stock/bond mix. Landmark attribution studies found allocation explains the large majority of a diversified portfolio's return variability over time, dwarfing security selection.

The right split is a function of horizon and stomach, not market forecasts. Stocks carry the growth and the drawdowns (the S&P 500 fell about 34% in five weeks in March 2020); bonds usually cushion, though 2022 broke the pattern with stocks and bonds down double digits together. A 90/10 investor who panic-sells at the bottom ends up poorer than a 60/40 investor who holds, which is the practical argument for allocating to what you can actually sit through.