Asset allocation is to investment planning what the foundation is to a house or the chassis is to a car. It’s what everything else is built upon. And just as important as constructing a house on a firm foundation, having the right asset allocation can be vital to helping you work toward your financial goals.

Although the name may sound intimidating, asset allocation is just technical term for a rather simple concept. Asset allocation is merely how your portfolio is divided up among different types of investments, such as stocks, bonds, and what are called “cash alternatives.”

How asset allocation works

Using asset allocation to build a portfolio designed to help you reach your long-term goals requires taking three primary factors into consideration:

Goals. These are simply what you’re investing to achieve. For many of us, a major goal is to enjoy a financially secure retirement. If you have younger children or grandchildren, helping them afford higher education without bui...