What is meant by "asset allocation" in investment management?

Asset allocation refers to the strategy of distributing an investment portfolio across various asset categories, such as stocks, bonds, real estate, and cash equivalents. This process is foundational in investment management as it helps investors achieve a balance between risk and return based on their individual goals, time horizon, and risk tolerance. By diversifying investments across different asset classes, investors can potentially reduce the overall risk of their portfolio, since different assets typically react differently to market conditions.

In contrast, selecting individual securities pertains to choosing specific stocks or bonds within the chosen asset categories, which is a more granular aspect of portfolio management and does not encompass the broader strategy of asset allocation. Increasing the investment in equities refers specifically to a tactical shift within an asset class, and consolidating investments into fewer categories would decrease diversification, which is generally not advisable as a strategy for risk management. Thus, the process of effectively dividing an investment portfolio among different asset categories is crucial for achieving long-term financial objectives while managing volatility and risks.