Which funds you pick matters far less than one number: the split between stocks and bonds. That ratio explains most of what a portfolio does.
The decision that matters most
Which specific funds you buy matters far less than the split between stocks and bonds. That single ratio explains most of how a portfolio behaves — both the return you can expect and the fall you have to sit through.
Stocks have delivered higher long-run returns and much larger drops. Bonds do the reverse. Allocation is simply choosing where on that trade-off you sit.
The old rule, and why it aged badly
The classic shortcut was to hold your age in bonds — 30 years old, 30% bonds. It was memorable and is now generally considered too conservative, because it was written when people retired earlier and lived less long.
Common modern variants use 110 or 120 minus your age for the stock allocation, which puts a 30-year-old somewhere around 80–90% stocks. Treat any of these as a starting point rather than an answer, because age is a proxy for the thing that actually matters.
What actually matters is the horizon
Not how old you are, but when you need the money. Two 40-year-olds — one retiring at 65, one buying a house in three years — should not hold the same portfolio for those goals.
- Under 3 years — no stocks. This is cash territory.
- 3 to 10 years — a mix, weighted towards bonds as the date approaches.
- Over 10 years — stock-heavy is defensible, because there is time to recover from a bad stretch.
Hold each goal in its own allocation rather than averaging everything into one number.
A theoretically optimal 90% stock portfolio that you abandon in a crash is worse than a 60% portfolio you hold. Before choosing, look at the real number: a 50% fall on 90% stocks is roughly 45% of everything. If that would make you sell, you have found your answer, and it is a lower one.
What bonds are for
Not return. Bonds are there to reduce how far the portfolio falls and to give you something to sell that has not collapsed — which is what matters when you are drawing income or rebalancing.
They are not risk-free. Bond prices fall when interest rates rise, and long-duration bonds fall a lot. For most people a broad, intermediate-term bond fund is the sensible default rather than anything exotic.
Rebalancing: the discipline that makes it work
Left alone, a 70/30 portfolio drifts. A strong run in stocks makes it 80/20 — more risk than you chose, arrived at silently.
Rebalancing means selling some of what grew and buying what did not, returning to target. It feels wrong every time, which is precisely why it works: it enforces selling high and buying low without requiring a forecast.
Once a year is plenty. Or use a threshold — rebalance when any holding drifts more than five points from target. Doing it more often adds costs and taxes without adding much.
Where you hold things matters too
If you have both retirement and taxable accounts, keep the tax-inefficient holdings — bond funds especially — inside the retirement accounts where their income is shielded, and the tax-efficient broad stock funds in the taxable one. Same overall allocation, lower tax bill. See how taxable accounts are taxed.
The simplest version that is not a compromise
A target-date fund holds a global stock and bond mix and shifts it automatically as its year approaches. For a single retirement goal it is a complete answer, and it removes both the drift and the rebalancing decision.
This is educational content, not investment advice. No allocation removes the possibility of loss.