Asset allocation
How you split your investments across asset classes — typically stocks, bonds, and cash. The biggest driver of long-term returns and volatility.
Asset allocation is the percentage of your portfolio in each major asset class: stocks, bonds, cash, real estate, sometimes commodities or alternatives. Studies repeatedly show that allocation explains the majority of a portfolio's long-term return and volatility — more than specific stock picks, more than market timing.
Two simple rules of thumb:
- Age-based: subtract your age from 110. That's a rough target for the % in stocks. A 30-year-old leans 80% stocks; a 60-year-old leans 50%. The remainder is bonds and cash.
- Risk-based: pick an allocation you can hold through a 40% drop without selling. If 80/20 stocks/bonds makes you anxious during a 20% drawdown, you're too aggressive — and you'll lock in losses by selling. Better to be 60/40 and stay invested.
Allocation should shift as life changes — closer to retirement, you want less stock volatility because you have less time to recover. Major life events (marriage, kids, inheritance) are good prompts to re-examine.
Rebalancing is the discipline of selling what's grown and buying what's lagged to maintain your target allocation. Most people do this once or twice a year.
See also
- Diversification — Spreading your investments across many holdings so that no single one can sink your portfolio. The only free lunch in investing.
- Risk tolerance — Your personal ability — both financial and emotional — to handle losses in your investments without panic-selling.
- Index fund — A mutual fund or ETF that holds every stock in a market index (like the S&P 500) instead of picking individual stocks. Cheap, diversified, boring — and that's the point.
- ETF (Exchange-Traded Fund) — A basket of stocks (or bonds, commodities) that trades on a stock exchange like a single stock. Most ETFs track an index.
Ask Cashowa about asset allocation
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