GLOSSARY · INVESTING

Asset allocation

How a portfolio is divided between broad kinds of investment, mainly stocks, bonds and cash. The split sets most of a portfolio's risk: how far it can fall in a bad year and how much it is likely to grow over decades. It is usually chosen from the time until the money is needed and how large a fall the owner could live through without selling.

Also called: stock-bond mix, portfolio mix, allocation, stock and bond mix, investment mix

FORMULA

Stock share = value of stocks ÷ value of the whole portfolio

COMPUTE IT WITH YOUR NUMBERS

Asset allocation by age & risk →What stock/bond/international mix should I hold?Portfolio rebalancing →How much of each fund to buy/sell to hit target?

LEARN IT PROPERLY

CHAPTER · INVESTMENT FOUNDATIONS · FOUNDATIONSFinding the Level of Risk You Can Live With CHAPTER · INVESTMENT FOUNDATIONS · FOUNDATIONSGetting Started: Accounts, Funds and a First Investment

SOURCES

Asset Allocation. U.S. Securities and Exchange Commission, Investor.gov.
Portfolio Selection. Harry Markowitz, Journal of Finance, 1952.
Does Asset Allocation Policy Explain 40, 90, or 100 Percent of Performance?. Ibbotson & Kaplan, Financial Analysts Journal, 2000.

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