What is asset allocation?

Asset allocation is fundamentally about the process of dividing investments among various asset categories, such as stocks, bonds, real estate, and cash. This strategic distribution is crucial because it helps manage risk and optimize the potential for returns based on an individual’s financial goals, risk tolerance, and investment timeline. By diversifying investments across different asset classes, investors can reduce the impact of any single asset's poor performance on the overall portfolio.

The other options provided do not capture the essence of asset allocation. Investing solely in stocks focuses on a single asset class, which does not employ the diversification tactic that asset allocation emphasizes. The option that refers to calculating net worth is unrelated to the concept of allocating assets among different categories. Lastly, a strategy that avoids bonds restricts the potential benefits of diversification and does not reflect a balanced approach to investment strategy, which is essential in asset allocation. Overall, option B accurately describes the comprehensive approach of asset allocation, highlighting its importance in effective financial planning.