How Do You Choose the Right Asset Allocation?
Your ideal allocation depends on three factors: time horizon, risk tolerance, and financial goals. Younger investors with decades until retirement can typically hold more stocks for higher growth potential and tolerate short-term losses. Those near retirement often shift toward more bonds and cash to preserve capital. A common starting point is subtracting your age from 110 to determine your stock percentage.
What Asset Classes Should Be in a Portfolio?
A diversified portfolio typically includes domestic stocks, international stocks, bonds, and sometimes alternative assets like real estate investment trusts. Each asset class behaves differently across economic cycles. Stocks offer growth but with higher volatility. Bonds provide stability and income. International stocks reduce concentration in any one country's economy. Combining uncorrelated assets smooths overall portfolio performance.
How Often Should You Review Your Asset Allocation?
Review your allocation at least annually and whenever you experience a major life change such as a job change, marriage, new child, or approaching retirement. Markets naturally drift your allocation over time — a 60/40 stock-bond portfolio can shift to 70/30 after a strong equity bull market. Rebalancing restores your target allocation and maintains your intended risk level.
Frequently asked questions
What is a 60/40 portfolio?
A 60/40 portfolio holds 60% stocks and 40% bonds. It has been a traditional balanced allocation for moderate-risk investors, offering growth potential from stocks with stability from bonds. While its performance has varied in different interest rate environments, it remains a widely used benchmark for balanced investing.
Should my asset allocation change as I age?
Yes, most financial planners recommend gradually shifting from higher-growth, higher-risk assets like stocks toward more conservative assets like bonds as you approach retirement. Target-date funds do this automatically, making them a convenient all-in-one solution for retirement savers.