What is asset allocation?

Asset allocation refers to the strategy of dividing an investment portfolio among different asset categories, such as stocks, bonds, real estate, and cash. This approach aims to balance risk and reward according to an individual's investment goals, risk tolerance, and time horizon. By spreading investments across various asset classes, investors can potentially reduce volatility and improve their chances of achieving stable returns over time.

Effective asset allocation recognizes that different asset categories react differently to market conditions. For instance, stocks may provide high returns during bull markets, while bonds might offer stability in bear markets. Thus, a well-diversified portfolio that includes a mix of asset types can help manage risk while seeking growth.

The other choices focus on narrower strategies that do not encompass the broader concept of asset allocation. Selecting individual stocks is part of active investing but does not provide the diversification benefits that are central to asset allocation. Customizing a portfolio with one asset type would not provide the protective advantages that a mix of assets would. Lastly, investing exclusively in bonds neglects the potential benefits of including other asset classes, which is contrary to the principle of asset allocation.