What does "asset allocation" refer to in investing?

Asset allocation refers to the strategy of distributing investments among different asset categories, such as stocks, bonds, cash, and other investments. This approach is fundamental in investing as it helps in managing risk and optimizing returns based on an investor's goals, risk tolerance, and investment horizon.

By diversifying assets across various categories, investors can potentially mitigate the negative impact of market volatility on their overall portfolio. If one asset class, for example, stocks, performs poorly, other classes, like bonds or real estate, may perform well and help balance overall portfolio performance. Proper asset allocation is crucial for building a resilient investment strategy that aligns with an investor’s financial objectives.

While the other choices explore different financial concepts, they do not accurately encapsulate the essence of asset allocation. Selling underperforming assets is a strategy focused on portfolio management rather than a systematic approach to distributing investments. Evaluating mutual fund performances relates to assessing individual fund effectiveness, which is separate from the broader strategy of asset allocation. Balancing a budget speaks to personal finance management rather than investment strategy. Thus, option B accurately captures the core definition of asset allocation in the investing context.