Asset Allocation: Asset Allocation involves dividing an investment portfolio among different asset classes—such as stocks, bonds, real estate, and cash—based on an individual’s risk tolerance, time horizon, and financial goals. The strategy aims to optimize returns while minimizing risk through diversification. For example, younger investors may favor stocks for growth, while retirees may prefer bonds for stability. Periodic rebalancing ensures the portfolio maintains its target mix despite market movements. Modern Portfolio Theory supports this approach by emphasizing the importance of correlation between assets. Proper asset allocation is widely regarded as the most critical factor in long-term investment success, often outweighing individual stock selection or market timing.
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