Define asset allocation.

Asset allocation refers to the strategic distribution of investments across different asset classes, such as stocks, bonds, cash, and real estate, with the aim of optimizing the balance between risk and return in an investment portfolio. This process involves analyzing the risk tolerance of the investor, their investment goals, and time horizon to create a diversified mix of assets. By doing so, it minimizes the impact of any single asset's poor performance on the overall portfolio, as different asset classes perform differently under various market conditions.

This approach helps in managing risk while seeking to achieve desired returns over time. Achieving an appropriate asset allocation is crucial because it lays the foundation for long-term investment success by aligning with the investor's unique financial situation and objectives.