Asset allocation is choosing which types of investments to put in a portfolio and how much of each to have.
Investments can be grouped into three major asset classes: stocks, bonds, and money market instruments. Stocks generally have had the highest risk but also the greatest potential return. Money market instruments carry the least risk but the lowest potential return, and bonds fall somewhere in the middle.
The asset classes you choose, and how you weight your investment in each, will depend upon your investment time frame, risk comfort level, and other individual considerations -- and how these match with the risks and rewards of each asset class. Generally, your asset allocation will change as you reach different stages in your life and as your investment goals change along with these shifts in lifestyle.