Asset allocation is the process of determining how to distribute investments among different asset categories, such as stocks, bonds, real estate, and cash. The goal of asset allocation is to balance risk and return by selecting a mix of assets that aligns with an investor's specific financial goals, risk tolerance, and time horizon.

The main idea behind asset allocation is that different types of assets have different risk and return characteristics. 

• Stocks, for example, tend to have a higher potential return than bonds, but also tend to be more volatile. 

• Real estate, on the other hand, may have a lower potential return than stocks, but also tends to be less volatile. 

By allocating investments among different asset categories, investors can potentially reduce the overall risk of their portfolio while still maintaining a reasonable level of return.

The process of asset allocation begins with determining an investor's specific financial goals, risk tolerance, and time horizon. Based on these factors, an asset allocation strategy can be developed that is tailored to the investor's needs. 

• For example, a younger investor with a long-term investment horizon and a high risk tolerance might allocate a larger portion of their portfolio to stocks, 

• while an older investor nearing retirement with a shorter-term investment horizon and a lower risk tolerance might allocate a larger portion of their portfolio to bonds.

Once an asset allocation strategy has been determined, the next step is to select specific investments to fill each asset category. 

• For example, if an investor has decided to allocate a portion of their portfolio to stocks, they might choose to invest in a diversified selection of individual stocks or a stock mutual fund. 

• Similarly, if an investor has decided to allocate a portion of their portfolio to bonds, they might choose to invest in a diversified selection of individual bonds or a bond mutual fund.

It's important to note that asset allocation is not a one-time process, it should be regularly reviewed and adjusted as necessary based on changes in the investor's financial goals, risk tolerance, and time horizon, as well as changes in market conditions. A well-diversified portfolio that is regularly rebalanced can help an investor to navigate market volatility and achieve their long-term financial goals.