Asset allocation is the most important decision in portfolio management: how to divide capital across major asset classes (stocks, bonds, cash, real estate, alternatives). The famous Brinson study (1986) found that ~90% of portfolio return variability comes from asset allocation, not security selection or market timing. Strategic allocation sets long-term targets based on goals and risk tolerance (e.g., 60% stocks, 40% bonds). Tactical allocation makes short-term tilts based on market views (overweight stocks when optimistic). Classic frameworks: 60/40 stocks/bonds for balanced investors, 80/20 for growth, 40/60 for conservative. Modern approaches add alternatives (private equity, hedge funds) and inflation hedges (commodities, TIPS) for further diversification.