Asset Allocation

Financial Dictionary -> Investing -> Asset Allocation

Asset Allocation is the overall term that describes how an investor spreads their cash for investing throughout different types of investment, such as savings accounts, stocks and bonds. The main purpose for people that actively look in to asset allocation is to devise a strategy that weighs up their aims and risks so their total investment is safe yet will make a reasonably quick return.

For example putting all of your money in to a savings account is safe, but returns are low. Studying asset allocation may make you change your mind into putting 80% into a savings account and the other 20% into the stock market.

There is no strict calculation for determining which is the best way to allocate your assets and investments; it all boils down to personal choice and the amount of risk you are willing to take. There is an old saying that states "never put all of your eggs into one basket". This means if all of your money is invested in the same place then if it goes under you will lose all of your money. If you spread your cash throughout multiple investments then if one goes bad there are still others to fall back on.

A typical member of the public may have some money tied up in real estate (their home), several bank accounts (regular and savings account), and some kind of pension plan for when they retire and a few shares in a steady company like Microsoft. This may all occur without really considering the definition of asset allocation.

For those unsure of how to allocate their investments, many opt for mutual funds, which are a collective investment that pools several party's money and invests in several different asset classes including the money market, stocks, bonds and other securities.