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The process of dividing an investment portfolio among different asset categories such as stocks, bonds, and cash.
Asset allocation is widely considered the most important investment decision, accounting for roughly 90% of a portfolio's return variability according to the landmark Brinson, Hood, and Beebower study. A common rule of thumb is to subtract your age from 110 to determine your stock allocation (e.g., a 30-year-old might hold 80% stocks, 20% bonds). Target-date funds automate this process by gradually shifting from stocks to bonds as the target retirement date approaches.