Asset allocation is how your money is split across broad categories of investments, mainly stocks, bonds, and cash, based on your goals, timeline, and comfort with risk. Research has consistently identified it as one of the single biggest drivers of a portfolio's long-term performance and volatility, arguably more influential than which specific stocks you pick.
Where diversification is about spreading risk within an asset class, owning many stocks instead of one, asset allocation is about the mix between asset classes entirely, how much sits in stocks versus bonds versus cash. The two concepts work together but answer different questions.
One traditional rule of thumb suggests holding a percentage in bonds roughly equal to your age, with the rest in stocks, gradually shifting toward a more conservative mix as you approach your goal. Under this framework, a 30-year-old might hold 30% bonds and 70% stocks, while a 60-year-old might hold 60% bonds and 40% stocks. This is a simplified starting point, not a strict rule, and many modern investors use more nuanced approaches based on their specific income, goals, and other assets.
Over time, as stocks and bonds grow at different rates, your original allocation drifts. A portfolio that started at 70% stocks and 30% bonds might, after a strong few years for stocks, drift to 80% stocks and 20% bonds without you doing anything. Rebalancing means periodically selling a bit of what's grown and buying more of what hasn't, to bring the mix back to your original target, keeping your actual risk level in line with what you originally intended.
See how a stock-heavy vs. bond-heavy mix could perform differently over your specific timeline.
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