Asset allocation is how you split your money among stocks, bonds, and cash. Studies consistently find it explains the large majority of a portfolio’s return variability — far more than which specific funds you pick.
Start from your time horizon
The longer until you need the money, the more volatility you can ride out, and the more you can lean toward stocks.
| Horizon | Example goal | Typical lean |
|---|---|---|
| Under 3 years | Down payment, emergency buffer | Mostly cash/bonds |
| 3–10 years | A near-term goal | Balanced |
| 10+ years | Retirement | Mostly stocks |
Two simple frameworks
- Rule of 110 — subtract your age from 110 for a rough stock percentage. At 30, that is ~80% stocks / 20% bonds.
- Three-fund portfolio — a US stock index fund, an international stock index fund, and a bond index fund. Adjust the weights to your horizon and done.
Rebalancing
Over time, winners grow and drift your mix away from target. Rebalancing means periodically selling a little of what grew and buying what lagged to return to your target weights.
- When: once or twice a year, or when a class drifts more than ~5 points from target.
- Why: it keeps risk in check and quietly enforces “buy low, sell high.”
In tax-advantaged accounts you can rebalance freely. In taxable accounts, prefer rebalancing with new contributions to avoid triggering taxable gains.
Risk tolerance is real
The best allocation is one you will actually hold through a downturn. A plan you abandon at the bottom is worse than a more conservative plan you keep. Next: Dollar-Cost Averaging.