What is Portfolio Allocation?
Portfolio allocation is the strategic distribution of investment capital across different asset classes, sectors, and positions to optimize risk and return according to your goals and risk tolerance.
Portfolio Allocation Explained
Proper allocation prevents any single trade or event from devastating your portfolio. Common guidelines include not risking more than 1-2% per trade, not having more than 5-10% in a single stock, and diversifying across sectors. Even the best traders use allocation rules because no one is right 100% of the time.
Real-World Example
A $100,000 portfolio might be allocated as: 60% long-term index funds, 20% individual stock positions (maximum 5% each), 10% short-term trading capital, and 10% cash reserve. No single position can destroy the portfolio.
Related Terms
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