Related Terms • Diversification • Portfolio • Sector

Definition: Asset Allocation [also known as Diversification] is the act of splitting investments up into different companies, sectors, industries, or countries, in order to protect the overall portfolio from drastic downturns in the market.

Examples: If an investor had $10,000 and wanted to diversify, they could put $5,000 in a blue chip fund, $2,500 in a technology group, and $2,500 in consumer cyclical stocks.  Therefore, if blue chips had a good year, and tech a bad one, they would off-set each other.

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