Asset Allocation

The term “asset allocation” refers to how your money is spread across asset types such as stocks, bonds and cash. It matters because certain allocation mixes are better than others — especially as we go through different stages of life.

For example, if you’re 30, having all your investments in government bonds is likely not serving you well, since stocks tend to outperform bonds over long periods. There’s no one-size-fitsall asset allocation, but a common suggested rule is to subtract your age from 100, with the result being the percentage of your investments to hold in stocks. So if you’re 30, your long-term investments would be 70% in stocks — with perhaps 20% to 25% in bonds and the rest in cash. With many people living longer these days, some have revised that rule, having you subtract your age from 110.

Those with money they won’t need for decades might consider having close to all their long-term investments in stocks — since the stock market has been such a great wealth-builder over long periods. One or more low-fee, broad-market index funds can be all you need for this. Consider funds that track the S&P 500 or the entire U.S. or world stock market.

Your asset allocation should probably be adjusted over time as you approach and enter retirement. It can also need adjustments whenever it gets out of balance. For instance, imagine that you allocate 85% of your portfolio to stocks and 10% to bonds (with 5% in cash). If, over some years, your stocks grow faster than your bond investments and you end up with a 90-5 stockbond split, you’ll likely want to sell some stocks and invest in some bonds in order to maintain your desired 85-10 ratio.

Over time, you might also move some assets from high-growth stocks to solid dividend payers, as they can be less volatile and can generate income for you.

Spend some time reading up on asset allocation to see what mix of assets seems most likely to help you reach your goals.