Why Asset Allocation is Your Most Important Decision
Studies show that over 90% of a portfolio's return variability is determined by its Asset Allocation—the mix of different asset classes like stocks, bonds, and cash—rather than individual stock picking.
[Image of a pie chart showing different asset allocation models from conservative to aggressive]The Three Pillars of Allocation
- Stocks (Equities): Higher potential returns with higher volatility. Best for long-term growth.
- Bonds (Fixed Income): Lower returns but provides stability and income. Acts as a cushion during market crashes.
- Cash/Cash Equivalents: High liquidity and safety, but often loses value to inflation over time.
Risk Tolerance and Time Horizon
Your "ideal" mix depends on two factors: when you need the money (Time Horizon) and how much loss you can stomach without selling (Risk Tolerance). A common rule of thumb is the "Rule of 110": subtract your age from 110 to find your ideal stock percentage.
Stock % = 110 - Your Age
Rebalancing Your Portfolio
Market movements will naturally shift your allocation over time. If stocks perform well, they may become a larger portion of your portfolio than intended. Annual rebalancing ensures you sell high and buy low to maintain your target risk level.
Standard Model Portfolios:
- Conservative: 20% Stocks / 80% Bonds
- Balanced: 60% Stocks / 40% Bonds
- Aggressive: 90% Stocks / 10% Bonds