Asset Allocation Guidelines
Stock/bond allocations by age, risk tolerance frameworks, target-date fund glide paths, and rebalancing strategies
Key Numbers
Young Investors
80–90% Stocks
Near Retirement
40–60% Stocks
60/40 Avg Return
~8.6%
Rebalance Trigger
±5% Drift
Asset allocation — the mix of stocks, bonds, and cash in your portfolio — is the single most important factor determining long-term investment returns and volatility. Research suggests it accounts for over 90% of portfolio performance variation, outweighing individual stock picks or market timing.
Common Formulas
| Rule | Formula | Age 40 Example | Typical Fit |
|---|---|---|---|
| 100 Minus Age | 100 − age = stock % | 60 / 40 | Conservative investors |
| 110 Minus Age | 110 − age = stock % | 70 / 30 | Moderate investors |
| 120 Minus Age | 120 − age = stock % | 80 / 20 | Aggressive / longer lifespan |
Modern trend: With U.S. life expectancy at 65 now averaging 84.5 years, many advisors favor the 110 or 120 formula to fund 30+ year retirements. Vanguard's target-date funds start at 90% stocks and reach 50% at retirement.
Core Principles
Time Horizon Matters Most: The longer until you need the money, the more stocks you can hold. Stocks outperform over 20+ year periods but can lose 30–50% in any given year.
Risk Tolerance Is Personal: If a 40% portfolio drop would cause panic-selling, hold more bonds regardless of what the formulas suggest.
Sequence Risk Near Retirement: A market crash in the first years of retirement is especially damaging. Shift toward bonds 5–10 years before you'll begin withdrawals.
Diversify Within Classes: A common split is 60% U.S. / 40% international for stocks. Include both government and corporate bonds.
Allocation by Age
Age is a primary driver of allocation because it determines your time horizon and ability to recover from downturns. These ranges reflect common guidance — adjust for your personal risk tolerance and retirement timeline.
| Age | Stocks | Bonds | Cash | Focus |
|---|---|---|---|---|
| 20s | 80–100% | 0–20% | 0–5% | Maximum growth |
| 30s | 75–90% | 10–25% | 0–5% | Growth with stability |
| 40s | 60–80% | 20–40% | 0–5% | Balanced growth |
| 50s | 50–70% | 30–50% | 0–10% | Wealth protection |
| 60s | 40–60% | 35–55% | 5–15% | Income + preservation |
| 70s+ | 30–50% | 40–60% | 5–20% | Income + liquidity |
Target-Date Fund Glide Paths
Stock allocation (%) by target retirement year. Data as of 2025 fund prospectuses.
| Fund Family | 2065 | 2045 | 2030 | 2025 | Income |
|---|---|---|---|---|---|
| Vanguard | 90% | 85% | 63% | 50% | 30% |
| Fidelity Freedom | 90% | 80% | 57% | 47% | 24% |
| T. Rowe Price | 98% | 90% | 68% | 55% | 30% |
Don't go to 0% stocks: Even retirees in their 70s+ should maintain 30–50% in equities. With 20+ year retirements now common, growth is needed to outpace inflation.
Allocation by Risk Tolerance
Age is only one factor. Personal risk tolerance — how you emotionally and financially handle volatility — should also shape your allocation. Even a young investor may need more bonds if they would panic-sell during a downturn.
| Profile | Stocks | Bonds | Max Drawdown | You Can Handle… |
|---|---|---|---|---|
| Aggressive | 80–100% | 0–20% | −40% to −50% | Losing half without selling |
| Mod. Aggressive | 70–80% | 20–30% | −30% to −40% | Major drops, anxiety but holding |
| Moderate | 50–70% | 30–50% | −20% to −30% | Moderate volatility, balanced |
| Mod. Conservative | 30–50% | 50–70% | −10% to −20% | Some fluctuation, stability first |
| Conservative | 10–30% | 70–90% | −5% to −10% | Minimal volatility, preservation |
Historical Performance by Allocation (1928–2024)
| Allocation | Avg. Return | Best Year | Worst Year | Loss Years |
|---|---|---|---|---|
| 100% Stocks | 10.3% | +54.2% | −43.1% | 25 of 97 |
| 80 / 20 | 9.5% | +45.4% | −34.9% | 23 of 97 |
| 60 / 40 | 8.6% | +36.7% | −26.6% | 20 of 97 |
| 40 / 60 | 7.5% | +27.9% | −18.4% | 16 of 97 |
| 20 / 80 | 6.3% | +29.6% | −10.1% | 13 of 97 |
Stocks = S&P 500, Bonds = 10-Year Treasury. Nominal returns, not inflation-adjusted.
2022 reminder: In rising-rate environments, stocks and bonds can fall together (both dropped ~15–20% in 2022). TIPS, I-Bonds, or alternative assets can provide additional diversification beyond the traditional stock/bond mix.
Rebalancing
Market movements drift your portfolio away from its target. Rebalancing — selling winners and buying underweights to restore your target — maintains your intended risk level and systematically enforces "buy low, sell high."
| Method | How It Works | Pros | Cons |
|---|---|---|---|
| Calendar (Annual) | Rebalance once/year on a set date | Simple, low maintenance | May miss extreme drifts |
| Threshold (5%) | Act when any asset drifts 5%+ from target | Responsive to big moves | Requires monitoring |
| Calendar + Threshold | Annual review, but act if drift exceeds 5% | Best of both approaches | Slightly more complex |
| Cash Flow | Direct new contributions to underweight assets | Tax-efficient, no selling | Slow for large portfolios |
Example: 60/40 Portfolio ($110K After Growth)
| Asset | Target | Drifted | Action | After |
|---|---|---|---|---|
| Stocks | 60% ($66K) | 70% ($77K) | Sell $11K | 60% ($66K) |
| Bonds | 40% ($44K) | 30% ($33K) | Buy $11K | 40% ($44K) |
Tax-Efficient Rebalancing
| Tactic | How It Helps |
|---|---|
| Rebalance in tax-advantaged accounts first | Selling within a 401(k) or IRA avoids capital gains taxes |
| Use new contributions | Direct new deposits to underweight assets instead of selling overweight positions |
| Harvest losses | If rebalancing creates losses in taxable accounts, use them to offset gains elsewhere |
| Consider asset location | Hold bonds in tax-deferred accounts (taxed as income); hold stocks in taxable accounts (lower capital gains rates) |
Target-date fund alternative: Target-date funds rebalance automatically and shift to more bonds as you age. Vanguard and Fidelity offer index versions with expense ratios of 0.08–0.12% — a "set and forget" option.
Sources
- 1.Vanguard — Principles for Investing Success (Asset Allocation)
- 2.Vanguard — Target Retirement Funds & Glide Path Methodology
- 3.NYU Stern (Damodaran) — Historical Returns on Stocks, Bonds, and Bills (1928–2024)
- 4.Fidelity — How to Start Investing: Asset Allocation & Diversification
- 5.Morningstar — Target-Date Fund Landscape Report
- 6.Brinson, Hood & Beebower — Determinants of Portfolio Performance (Financial Analysts Journal, 1986)
This content is for educational and informational purposes only and does not constitute financial, tax, or legal advice. Consult a qualified professional for guidance tailored to your situation.