assetbest 
Graham from Moneystepper asks: What rule of thumb do you recommend for asset allocation based on age and risk appetite?
Asset allocation is the split of your investable money across broad categories like stocks, bonds, and cash. Research, notably the Brinson, Hood, and Beebower study, shows that how you divide your money among asset classes is the biggest driver of portfolio returns. In short, the percentage in stocks versus bonds matters more than the specific stocks or bonds you pick.
A common simple rule is the “100 minus your age” guideline: subtract your age from 100 and put that percentage into stocks, with the rest in bonds and cash. For example, a 40-year-old would hold 60% stocks and 40% fixed income.
Because people are living and working longer, many now use “120 minus your age.” Under this approach a 50-year-old would hold about 70% in stocks and 30% in bonds.
These rules are useful starting points, but they’re incomplete. Your allocation should also reflect how you handle risk. Younger investors often tolerate more risk because they have time to recover from losses, so they tend to hold more stocks. But not every young investor has a high risk tolerance; some prefer less volatility and should hold more fixed income.
Consider a real example: imagine you’re 30 with a 70% stock / 30% bond portfolio in 2008. U.S. stocks fell about 33.8% that year while a diversified bond index returned roughly 5.24%. That mix would produce a return near -22.1% for the year. On a $25,000 portfolio, that’s a drop to about $19,478—a painful loss, but less severe than being fully invested in stocks. A broad stock index like the S&P 500 fell about 36.6% in 2008, so diversification helped limit the damage.
To avoid panic selling after big drops, honestly assess your risk tolerance. Take a risk questionnaire or imagine how you’d feel if your portfolio fell by various amounts. If you know you’d panic and sell, choose a more conservative mix.
Also factor in your human capital and job security. If your income or job depends on market performance—or if your earnings are unpredictable—lean more toward bonds and cash. If you work in finance or another market-sensitive field, you might want fewer stocks because you’re already exposed professionally.
If you prefer a set-and-forget approach, consider asset allocation funds or target-date funds. Asset allocation funds hold a mix of stocks and bonds in one fund and come in conservative to aggressive varieties. Target-date funds automatically shift toward more conservative holdings as your chosen retirement date nears.
If you want help, low-cost digital advisors and fee-only financial planners can guide your allocation and rebalancing.
Practical steps:
1. Learn the basics of investing—start with a clear, accessible overview of asset classes and investment principles.
2. Take a risk tolerance quiz and imagine how you’d react to large, inevitable market declines.
3. Set an allocation that reflects your age, risk tolerance, job security, and how long you expect to work.
4. Consider simple solutions like target-date funds or diversified allocation funds if you want a hands-off option.
