is the distribution of financial assets among asset classes. It involves allocating and maintaining assets in three primary asset classes: equity, fixed-income and cash equivalents.

Financial assets belong in one of three basic asset class categories - equities, fixed-income or cash equivalents.

There are other asset classes which investors may own, such as real estate or commodities. However, these two classes take on a higher degree of risk due to volatility of prices from speculative trading and the potentially non-diversified nature of the investment asset allocation establishes the desired distribution of an investor financial assets among the asset classes based upon his/her risk tolerance and years until retirement. An investor asset allocation should become more conservative as retirement approaches. This presumes that retirement signifies the end of the period of earned wages and the beginning of consumption of savings and investments, for living expenses - a period when capital preservation is most important. Historically, equities have provided greater growth than other asset classes, but with greater price volatility. Fixed-income investments normally have less price fluctuation than equities, therefore they provide greater stability to the value of an investor s portfolio.

For example, an investor with a moderate risk tolerance and at least 15 years until retirement, might choose to maintain the following asset allocation -

As the investor moves closer to retirement, his/her portfolio should become more conservative, that is, assume less risk (price volatility). The portfolio would gradually change from a 60% exposure in equities to possibly 35% or 40% equities at the date of retirement. The fixed income portion might become 60% - 65% with the cash equivalents at 10%.