Asset allocation is a critical strategy for diversifying investments and managing risk. It involves spreading your investment portfolio across different asset classes, such as stocks, bonds, and cash equivalents, to achieve a balance between potential returns and potential risk.

For example, a well-diversified portfolio may include a mix of stocks from different industries, government and corporate bonds with varying maturities, and cash or cash equivalents like money market funds. By diversifying across asset classes, an investor can reduce the impact of a decline in any single investment or asset class.

References:

• Investopedia - Asset Allocation: https://www.investopedia.com/terms/a/assetallocation.asp
• Charles Schwab - Understanding Asset Allocation: https://www.schwab.com/resource-center/insights/content/understanding-asset-allocation