An asset allocation describes how investment is subdivided among various assets. For example, 60% equities, 35% bonds, 5% gold.
Asset allocation is typically the biggest decision an investor makes. It's highly dependent on the risk tolerance, time horizon, and unique properties of an investor - there's no best allocation for everyone. E.g. a risk intolerant individual will typically hold a higher than average percentage of US treasuries. A diversified asset allocation including uncorrelated assets reduces the chance of major losses, but also reduces the chance of major gains.
Vanguard's page on asset allocation
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