# Asset Allocation

> Asset allocation decides how much to hold in stocks, bonds, cash, commodities and other assets. Learn the main approaches, a 60/40 example and how to choose a mix.

Source: https://learn.tradelabsai.com/portfolio/asset-allocation/  
Track: Portfolio and Performance · Level: Advanced · Updated: 2026-10-03  
Publisher: TradeLabs AI (https://tradelabsai.com). Education, not financial advice.  
Cite as: TradeLabs Learn, "Asset Allocation", https://learn.tradelabsai.com/portfolio/asset-allocation/

Asset allocation is the decision of how to divide money among broad asset classes: stocks, bonds, cash, real estate, commodities and, for some investors, alternatives such as crypto. For long term investors it is usually the most important portfolio decision, because different asset classes behave very differently over time and in crises. Choosing individual stocks or funds matters less than getting the overall mix right for your goals, time horizon and tolerance for losses.

## The main asset classes

| Asset class | Role | Typical behaviour | Lesson |
|---|---|---|---|
| Stocks | Long term growth | High return, high volatility, large drawdowns | [What Is a Stock?](https://learn.tradelabsai.com/markets/what-is-a-stock/) |
| Government bonds | Stability, income, crisis protection | Lower return, lower volatility; often rise when stocks fall, but not always | [What Is a Bond?](https://learn.tradelabsai.com/markets/what-is-a-bond/) |
| Corporate bonds | Higher income | Between stocks and government bonds | [Corporate Bonds](https://learn.tradelabsai.com/bonds-credit/corporate-bonds/) |
| Cash and bills | Liquidity, safety | Low return, near zero volatility | [Treasury Bills, Notes and Bonds](https://learn.tradelabsai.com/bonds-credit/treasury-bills-notes-and-bonds/) |
| Commodities and gold | Inflation protection, diversification | Volatile; sometimes rise when stocks and bonds fall | [What Are Commodities?](https://learn.tradelabsai.com/markets/what-are-commodities/) |
| Real estate | Income, inflation link | Can be illiquid; listed real estate behaves partly like stocks | |
| Crypto | Speculative growth, diversification debated | Extremely volatile | [Bitcoin](https://learn.tradelabsai.com/crypto/bitcoin/) |

## Approaches to asset allocation

| Approach | How it works |
|---|---|
| Strategic | A long term target mix, rebalanced periodically. See [Rebalancing](https://learn.tradelabsai.com/portfolio/rebalancing/) |
| Tactical | Temporary shifts around the target based on market views. See [Macro Trading](https://learn.tradelabsai.com/strategies/macro-trading/) |
| Age based (glide path) | Shift from stocks to bonds as a target date approaches |
| Risk parity | Balance risk contributions rather than dollar amounts. See [Risk Budgeting and Risk Parity](https://learn.tradelabsai.com/portfolio/risk-budgeting-and-risk-parity/) |
| Optimised | Mean variance or other optimisation. See [Modern Portfolio Theory and the Efficient Frontier](https://learn.tradelabsai.com/portfolio/modern-portfolio-theory/) |
| All weather style | Balance exposure to growth and inflation regimes |

## The classic 60/40 portfolio

A long standing benchmark is 60% stocks and 40% bonds. It aims to capture much of the stock market's growth while bonds soften the falls.

**Example: Expected return and risk of 60/40**
Assume stocks have an expected return of 7% with 16% volatility, and bonds 3% with 6% volatility, with zero correlation between them. The expected return of a 60/40 mix is 0.6 times 7% plus 0.4 times 3%, or 5.4%. Portfolio volatility is the square root of (0.6 squared times 16% squared plus 0.4 squared times 6% squared), which is about 9.9%. The portfolio keeps about 77% of the stock return with about 62% of the volatility. If the correlation turned positive, as in 2022 when stocks and bonds fell together, volatility would rise and the protection would shrink. These inputs are illustrative assumptions, not forecasts. See [Covariance and Correlation](https://learn.tradelabsai.com/math/covariance-and-correlation/).

## Choosing your allocation

| Factor | Effect |
|---|---|
| Time horizon | Longer horizons can tolerate more stocks |
| Risk tolerance | Ability and willingness to endure drawdowns. See [Maximum Drawdown](https://learn.tradelabsai.com/portfolio/maximum-drawdown/) |
| Income needs | More bonds and cash for near term spending |
| Other wealth | Job stability, home ownership, pensions |
| Inflation exposure | Real assets can help |

A useful test: imagine your portfolio falling by half the worst historical drawdown of its riskiest asset. If that would make you sell, the allocation is too aggressive.

## Asset allocation versus security selection

A widely cited 1986 study by Brinson, Hood and Beebower found that asset allocation policy explained most of the variation in pension funds' returns over time. The exact interpretation has been debated, but the practical lesson holds: the mix of asset classes drives most of a diversified portfolio's ups and downs. See [Diversification](https://learn.tradelabsai.com/portfolio/diversification/).

## Traders and allocation

Active traders also allocate: between trading capital and long term savings, across strategies and across markets. Keeping a core long term allocation separate from a trading account limits the damage a bad trading year can do. See [Investing vs Trading](https://learn.tradelabsai.com/start-here/investing-vs-trading/) and [Bankroll Management](https://learn.tradelabsai.com/risk/bankroll-management/).

## Frequently asked questions

### What is asset allocation?

Deciding how to divide a portfolio among asset classes such as stocks, bonds, cash, commodities and real estate.

### Is 60/40 still a good portfolio?

It remains a common benchmark, but its performance depends on stock and bond correlations and starting yields; it suffered in 2022 when both fell.

### How often should I change my asset allocation?

Strategic allocations usually change only when goals or circumstances change, with periodic rebalancing back to targets.

Next, learn why combining assets reduces risk in [Diversification](https://learn.tradelabsai.com/portfolio/diversification/).

## Continue learning

- Next lesson: [Diversification](https://learn.tradelabsai.com/portfolio/diversification/)
- Previous lesson: [Portfolio Construction](https://learn.tradelabsai.com/portfolio/portfolio-construction/)
- Related: [Portfolio Construction](https://learn.tradelabsai.com/portfolio/portfolio-construction/): Portfolio construction turns investment ideas or trading strategies into a set of positions with sensible sizes. Learn the steps, common methods and constraints.
- Related: [Diversification](https://learn.tradelabsai.com/portfolio/diversification/): Diversification lowers risk by combining assets that do not move together. Learn the maths, how many holdings you need, its limits in crises and common mistakes.
- Related: [Rebalancing](https://learn.tradelabsai.com/portfolio/rebalancing/): Rebalancing brings a portfolio back to its target weights after markets move. Learn calendar and threshold rebalancing, costs, taxes and the rebalancing premium.
- Related: [Risk Budgeting and Risk Parity](https://learn.tradelabsai.com/portfolio/risk-budgeting-and-risk-parity/): Risk parity balances how much risk each asset contributes instead of how much money it holds. Learn risk budgeting, a worked example, leverage and drawbacks.
- Related: [Modern Portfolio Theory and the Efficient Frontier](https://learn.tradelabsai.com/portfolio/modern-portfolio-theory/): Modern portfolio theory shows how combining assets can improve return for a given risk. Learn the efficient frontier, minimum variance portfolio and its limits.
- Related: [Active vs Passive Investing](https://learn.tradelabsai.com/portfolio/active-vs-passive-investing/): Active investing tries to beat the market; passive investing tracks it at low cost. Learn the evidence on performance, the impact of fees and how to choose.