Asset allocation is the way in which you diversify your investments. Most investors do it by dividing their money among three major asset classes: stocks, bonds and cash. Since each asset class responds differently to shifts in the economy and financial markets, diversifying your assets this way can help you minimize your risk of loss while maximizing your potential for return. Morgan Stanley's economists and strategists engage in rigorous country-by-country analyses of economies and markets around the world. Our Investment Policy Committee distills these views into asset allocation and equity sector emphasis models to suit varying investment styles and objectives. The Age-In-Bonds Theory In general, your asset allocation should reflect your goals, your risk tolerance, and your investment time horizon. A simple rule of thumb suggests subtracting your age from 100 and investing that percentage in stocks. The remainder is invested in bonds and cash. For instance, if you are 25, you would put 75% of your money in stocks and 25% in bonds or cash instruments. Of course, specific situations may require modifications to the suggested allocation, but the general idea is that the longer your time horizon, the greater the potential return for stock investments. In our view, the best time to begin investing in stocks is now.