Asset Allocation

Asset allocation is widely considered the most important investment decision you'll make — studies suggest it explains over 90% of a portfolio's return variation over time. It's the big-picture decision of how much to put in stocks versus bonds versus other asset classes, and it matters far more than which specific stocks or funds you pick.

The classic starting framework is age-based: subtract your age from 110 or 120 to get your stock percentage, with the remainder in bonds. A 30-year-old might hold 80-90% stocks and 10-20% bonds. A 60-year-old might hold 50-60% stocks and 40-50% bonds. This is a simplified starting point, not a rigid rule.

Your risk tolerance plays a major role. Even if your age suggests 80% stocks, if a 30% portfolio decline would cause you to panic-sell, a more conservative allocation is better. The best allocation is one you can stick with through market downturns — abandoning your plan during a crash is far more damaging than being slightly suboptimal.

Modern asset allocation extends beyond stocks and bonds to include real estate (REITs), commodities, international stocks, emerging markets, TIPS (inflation-protected bonds), and for some investors, cryptocurrency. Each addition should reduce correlation and improve the risk-return profile.

Review and adjust your allocation as your life circumstances change — approaching retirement, changing income, major expenses, or shifting goals. Target-date funds automate this by gradually shifting from stocks to bonds as the target date approaches.