Why this matters
Choosing the shares of asset classes and sources of risk in a portfolio in line with its objective and constraints.
Example
If an investor faces a required payment soon, the funds reserved for that payment may have a different function from investments for a long-term goal. The overall portfolio should be analyzed with these tasks in mind. A high expected return for one asset does not explain what share it should receive.
Common mistake
Asset allocation is not the same as selecting individual securities and does not guarantee diversification within each class. Funds may hold similar positions, and different bonds may depend on one borrower. Check the structure across the portfolio and set review rules. A change in personal circumstances may require a new target structure rather than simply restoring the previous weights.