What is asset allocation and how does it work?

Asset allocation refers to the process of deciding how to divide your investment across several asset categories. Stocks, bonds, gold, real estate and cash or cash equivalents are the most common components of an asset allocation strategy. Even if there are no guarantees, ideally, if your investments in one category are performing poorly, still you will have assets in another category that are performing good. The number of asset categories you select for your portfolio and the percentage of portfolio amounts you allocate to each category will depend, on your tolerance for risk, your investment goals, the size of your portfolio, and your time horizon.

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