Stocks, bonds, cash: how to think about risk
Asset allocation is the single biggest decision in your portfolio. Age and timeline drive it.
Last reviewed: · Reviewed by the Money Scale editorial team
Asset allocation = what % of your portfolio sits in stocks (high return, high volatility), bonds (lower of both), and cash (none of either). It explains ~90% of your return variability over time.
~110 − age
Stock % rule of thumb
At 30, ~80% stocks. At 60, ~50%. Tilt higher if you can stomach drawdowns.
Why bonds at all?
- •Bonds zig when stocks zag (sometimes). They cushion drawdowns.
- •When you're 5 years from retirement, a 40% stock crash matters way more than at age 30.
- •If you panic-sell stocks in a crash, you lock in losses. Bonds reduce the temptation.
Most retirement plans offer 'target-date funds' — set-and-forget portfolios that automatically shift from stocks to bonds as you age. Pick the year closest to your retirement and you're done.
Takeaway
Pick an allocation that matches your timeline. The right portfolio is the one you can hold through a 30% crash.
Why does a 30-year-old typically hold MORE stocks than a 60-year-old?
Sources
Vanguard — Asset allocation