Portfolio allocation is the strategy of dividing an investment portfolio among various asset classes, such as stocks, bonds, cash, alternative investments and real estate, to achieve an optimal balance between potential returns and risk.

It involves determining what percentage of the portfolio to allocate to each asset class based on the investor's goals, risk tolerance, and time horizon.

Its importance lies in several key aspects:

1. Risk management: Diversifying across asset classes helps mitigate the impact of market volatility on your overall portfolio.

2. Goal alignment: Allocation should reflect an investor's financial objectives, risk tolerance, and investment timeline.

3. Return optimization: Combining assets with different risk/return profiles can potentially enhance overall returns while managing risk.

4. Adaptability: Allocation can be adjusted as investor circumstances or market conditions change.

5. Behavioral control: A well-defined allocation strategy helps investors avoid emotional decision-making during market fluctuations.

In essence, effective portfolio allocation forms the foundation of a sound long-term investment plan, enabling investors to navigate market uncertainties, manage risk exposure, and work towards achieving their financial goals.