Asset allocation is the primary tool in the battle to build a diversified portfolio.
This is the task of figuring out how much of your portfolio will be invested in different asset classes, such as stocks, bonds, or cash. Asset allocation has been recognized as a very important part of the process of building a portfolio. In fact, one study has found that your decision as to how you will divide up your portfolio into several classes is more important than the process of choosing the actual stocks, bonds, and funds that you will own. In developing your asset allocation strategy, you should remember that, generally, the younger you are, the more risk you can afford to take. Preserving your portfolio as you reach your desired retirement age becomes more important since a large decline in the value of your holdings can affect your retirement lifestyle, or even make it impossible to retire according to your plans.