Asset allocation is the process of determining what percentage of an investment portfolio will be allocated to each class or type of asset.
Asset allocation establishes the structure of an investment portfolio and the investment percentages. These percentages are normally divided among four asset classes:
- Variable income
- Fixed income
- Liquid assets or cash
- Real estate investments
An example of asset allocation is a classic 60/40 portfolio where 60% of the investment is in equities, or variable-income assets, and 40% in fixed-income assets.