Asset allocation is the strategy of dividing your investments among different asset categories, such as stocks, bonds, and cash. A common rule of thumb for a balanced allocation is the '100 minus your age' rule, which suggests that the percentage of your portfolio allocated to stocks should equal 100 minus your age. For example, if you're 30, you might allocate 70% to stocks and 30% to bonds. This helps balance risk and reward based on your time horizon and risk tolerance.

Asset allocation is the process of spreading investments across various asset classes to optimize risk and return according to an investor's goals and risk tolerance. It helps in managing risk by not putting all your eggs in one basket, allowing for a more stable overall portfolio performance.