Few people realize the importance of Asset Allocation when it comes to one’s investment portfolio. And possibly, for the day trading professional investor who trades millions of dollars every day, this might not be such an important concept. However, for the everyday American working class, each day at the office is all in support of saving up for a new car, college tuition, that dream house, or ultimately retirement. Asset allocation defines how much of one’s portfolio should consist of different investment vehicles based on personal goals: risk aversion and time until investment money is needed. Time acts as a natural risk reducer because slight fluctuations in the market can be disregarded. The investor must look at his or her own personal goals and decide how much risk they would like to take. From there, they can allocate their assets among their various investment vehicles: stocks, bonds, mutual funds, cash, real estate. So why is it so important to follow asset allocation principles? First, it helps you analyze your individual goals and to plan for your future. Everyones situation is different and no one has your interests in mind better than you are. Second, by diversifying your assets, you are minimizing your risks because fluctuations in various markets go in cycles. Therefore, while your stocks may be having a bearish year, your bonds will pick up the slack and assuage the losses from stocks. You should always adjust your asset allocation every year or two as certain accounts may have grown at different percentages than other funds. If you are interested in reading more on asset allocation and looking through some suggested portfolios, read “A Random Walk down Wall Street” by Burton Malkiel.