Asset Allocation by Age: How to Split Stocks and Bonds

Asset allocation is how you divide your money between stocks, bonds and cash. It's one of the biggest drivers of both your long-term returns and how bumpy the ride feels. Picking the right mix usually matters more than picking the right individual stocks.

Why age matters

The more years until you need the money, the more time you have to recover from market drops, so you can afford to hold more stocks for their higher long-term growth. As you get closer to spending the money, a large loss becomes harder to recover from, so many investors shift gradually toward bonds and cash. See stocks vs. bonds for how each behaves.

Common rules of thumb

A traditional shortcut is to hold your age in bonds, so a 30-year-old would hold 30% bonds. Because people live longer and bond yields vary, many now use "110 or 120 minus your age" as the stock percentage instead. Under the 110 rule:

• Age 25: about 85% stocks, 15% bonds
• Age 40: about 70% stocks, 30% bonds
• Age 55: about 55% stocks, 45% bonds
• Age 70: about 40% stocks, 60% bonds

These are starting points, not prescriptions.

Other factors that matter

• Risk tolerance: if a 30% drop would make you sell in a panic, a slightly more conservative mix you can stick with is better than an aggressive one you abandon.
• Goals and timeline: money for a house in three years shouldn't be invested like retirement money for 30 years from now.
• Other income: a pension or stable job can let you take more stock market risk.
• Emergency fund: keep short-term cash separate from your investments.

Target-date funds

A target-date fund picks and adjusts the mix for you. You choose the fund closest to your expected retirement year, and it gradually moves from mostly stocks to more bonds as that year approaches. They're a popular one-fund choice in 401(k) plans. Check the expense ratio, and avoid holding several target-date funds at once, which defeats the purpose.

Rebalancing

Over time, market moves pull your portfolio away from its target. If stocks rally, they'll grow beyond your intended share. Rebalancing means selling some of what's grown and buying what's lagged, once or twice a year or whenever your mix drifts by more than about 5 percentage points. Doing it inside tax-advantaged accounts avoids triggering capital gains tax.

Use the portfolio tracker to see your current allocation, and the retirement calculator to check whether your plan is on track. See also how to diversify your portfolio.

This article is educational and not investment advice.