Our word of the day is “Asset Allocation” In the most basic sense, asset allocation

is simply how one's assets are divided among different asset classes, such as cash, stocks,

bonds, real estate, and so on -- even insurance investments, commodities, collectibles, and

other categories count. But the term also refers to an investment

strategy -- one that can reduce risk through diversification.

Clearly, having all your money in any one asset class can be risky. In 2008, the S&P

500 plunged 37 percent. If you'd held all your assets in an S&P 500 index fund, your

net worth would have taken a big hit that year.

Simply put, strategic asset allocation involves taking your money and dividing it up into

several pieces, which you then allocate across different types of assets. Once you've decided

on how much of your money will go into each broad asset category, you then drill down

and choose individual investments that fit into those categories.

The first step requires two decisions. First, you need to decide what sorts of assets you

want to include in your portfolio. Traditionally, asset allocation strategies usually stuck

with three major asset classes: stocks, bonds, and cash. But recently, the availability of

alternative investment classes like real estate, commodities, and specialized investments in

private equity and hedge funds led to many investors broadening their asset allocations

to include more complex combinations of assets. After you decide which assets to include,

you must then choose how much of your money to allocate to each asset class.