Asset allocation is the practice of dividing your investment portfolio among different asset categories, such as stocks, bonds, and cash. The allocation that works best for you changes throughout your life, depending on your time horizon and risk tolerance.
A common rule of thumb is to subtract your age from 100 to determine your stock allocation percentage. For example, a 30-year-old might hold 70% stocks and 30% bonds, while a 60-year-old might hold 40% stocks and 60% bonds.
As you approach retirement, gradually shifting toward more conservative investments can help protect your savings from market volatility. However, maintaining some growth investments is important to combat inflation over a long retirement.