What does an asset allocation strategy aim to achieve?

An asset allocation strategy specifically aims to achieve diversification of investments to manage risk. The core principle behind this strategy is that by spreading investments across various asset classes—such as stocks, bonds, real estate, and cash—an investor can reduce the impact of poor performance from any single investment or asset class on the overall portfolio.

Diversification helps to mitigate risk because different asset classes often react differently to the same economic events. For example, when stocks may be declining, bonds may provide stability or even increase in value. This balancing act helps preserve capital and provide more consistent returns over time, aligning with the investor's risk tolerance and investment goals.

While maximizing cash liquidity, minimizing tax liability, and increasing stock market speculation might be relevant financial considerations, they do not encompass the primary aim of an asset allocation strategy. A successful allocation minimizes risk through diversification, making it a foundational concept in effective investment management.