Portfolio management is the process of building and overseeing a collection of investments (like stocks, bonds, cash, and alternatives) to help an investor meet their financial goals and risk tolerance.

It involves selecting and managing investments to achieve specific objectives, whether for an individual investor or a large institution. This involves balancing risk and potential returns to maximize returns for the amount of risk an investor is willing to take.

Asset allocation, a core component of portfolio management, is the strategy of dividing a portfolio’s investments among different asset classes. Asset classes generally include stocks, bonds, and cash equivalents, but can also encompass alternatives like real estate or commodities.

In essence, asset allocation is about determining the right mix of investments for your unique situation, helping you to:

• Balance risk and return: Different asset classes have different risk profiles and potential returns. A mix of assets helps diversify your portfolio and can potentially help you achieve a better balance between risk and reward.
• Align investments with financial goals: Your asset allocation should reflect your individual financial goals (e.g., retirement, buying a home, education) and your ability to tolerate risk.
• Reduce short-term losses: By investing in different asset classes, you can reduce the impact of a market downturn in a particular sector.