Asset allocation
How much stock, bond and cash exposure fits your timeline, obligations and tolerance for losses.
Asset Allocation
A $100,000 portfolio that is all stocks loses $50,000 in a 50% crash. Move $40,000 of it into bonds and the same crash costs $30,000. The stocks behaved identically in both cases. The mix did all of the work.
That is why the split deserves an hour of your attention before you spend a weekend comparing funds. Your weights across stocks, bonds and cash set the size of your worst year, and the size of your worst year decides whether you are still invested when the recovery starts.
Five asset classes, three of them matter
| Class | Job in the portfolio | Long-run annual return | How it behaves |
|---|---|---|---|
| Developed-market stocks | Growth engine | 8-10% | Can fall 40% or more in one year |
| Emerging-market stocks | Growth from a different set of countries | 6-9% | Falls harder than developed markets |
| High-grade bonds | Stability, some income | 3-5% | Boring, which is the point |
| Real estate funds and REITs | Rental income | 7-9% | Roughly as volatile as stocks |
| Cash | Liquidity only | 2-4% | Never falls, barely grows |
Most people building wealth on a normal salary need the first three. Developed-market stocks do the growing. Emerging markets add a slice of economies that move to their own calendar. Bonds exist for the year when everything else falls at once. Property is already inside any broad index at a few percent, so a separate real estate fund is a tilt, not a requirement. Cash belongs in your emergency fund, where its job is to keep you out of the portfolio during a bad month rather than to earn anything.
What the mix decides when the market halves
The same crash applied to four portfolios. The bond side did nothing clever.
Illustrative. $100,000 portfolio, stocks fall 50%, bonds unchanged.
Read the recovery requirement, not only the loss. The investor who is down 50% needs a 100% gain to get back to even. The one who is down 30% needs 42.9%. Same market, same recovery, two very different experiences, and the person who needs 100% is the one most likely to sell at the bottom.
That asymmetry is what you are buying with the bond slice. Not return. The ability to keep making decisions while the screen is red.
The age rule, and who it is not for
| Age | Stocks | Bonds |
|---|---|---|
| 20s | 90-100% | 0-10% |
| 30s | 80-90% | 10-20% |
| 40s | 70-80% | 20-30% |
| 50s | 60-70% | 30-40% |
| 60 and over | 40-60% | 40-60% |
"100 minus your age in bonds" was written for people who retired at 62 and died at 78. Retirements now run thirty years, so plenty of advisers use 120 minus your age instead, and a 35-year-old following that version holds no bonds at all. Treat either number as a starting point, not a verdict.
The rule is wrong for two specific people. It is wrong for anyone saving a house deposit for the next three years, because money you need in 2029 has no business in the stock market at any age. It is also wrong for anyone whose fixed costs are already covered by a pension, since the pension is doing the job the bonds were hired to do. If your rent and your food are paid for life, you can carry more equity than a stranger of the same age.
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