Asset allocation simply refers to investing a certain percentage of your overall portfolio in different asset classes. The idea is that investing in different types of assets lowers your overall portfolio risk. For example, you could invest 50% of your portfolio in stocks, 25% in bonds, 10% in real estate, and 15% in cash or money market funds. Within each of these categories, you could diversify further. For example, within the stock portion you could invest in large cap (capitalization) stocks, mid cap stocks, and small cap stocks. Then within the bond category, you could invest in long term, intermediate term and short term bonds. It is important to remember that many asset classes, especially stocks and bonds, frequently move simultaneously.