investing
Asset Allocation
Asset allocation is the percentage split of a portfolio among different asset classes — typically stocks, bonds, and cash. It is the primary driver of long-term portfolio risk and return.
A classic rule of thumb is "110 minus your age" in stocks (so a 40-year-old holds 70% stocks, 30% bonds). More modern guidance adjusts for longer retirements and lower bond yields.
Stocks historically return more than bonds over long periods but with higher volatility. Bonds provide stability and income. Cash and cash equivalents protect against short-term needs but earn less than inflation over time.
Asset allocation should reflect your time horizon, risk tolerance, and income needs — not just market conditions.
Related terms
- Index Fund
- An index fund is a portfolio of stocks or bonds designed to replicate the performance of a market index, such as the S&P 500. Index funds have lower fees than actively managed funds because no stock-picking is required.
- Dollar-Cost Averaging (DCA)
- Dollar-cost averaging is an investment strategy where you invest a fixed dollar amount at regular intervals, regardless of price. It reduces the risk of investing a large sum at the wrong time.
- Safe Withdrawal Rate (SWR)
- The safe withdrawal rate is the maximum percentage of a retirement portfolio you can withdraw annually without running out of money over a given time horizon. The 4% rule is the most widely cited guideline.
Frequently asked questions
What is Asset Allocation?
Asset allocation is the percentage split of a portfolio among different asset classes — typically stocks, bonds, and cash. It is the primary driver of long-term portfolio risk and return.