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StrategyApril 28, 20268 min read

Asset Allocation 101: How to Split Your Portfolio by Age

The single most important portfolio decision isn\'t which stock to pick — it\'s how to divide between stocks and bonds.

What Is Asset Allocation?

Asset allocation is how you divide your investment portfolio among different asset classes — primarily stocks (equities) and bonds (fixed income). It's widely considered the most important investment decision you'll make, responsible for over 90% of long-term portfolio performance variation, according to academic research.

Why Asset Allocation Matters

Stocks offer higher long-term growth but come with significant short-term volatility. Bonds offer lower returns but provide stability and tend to hold value better during stock market crashes. Balancing the two creates a portfolio you can emotionally handle through both bull and bear markets.

The Classic Age-Based Rule

A traditional starting point: subtract your age from 110 (or 120 for a more aggressive approach) to find your stock allocation percentage. The remainder goes to bonds.

  • Age 25: 85–95% stocks, 5–15% bonds
  • Age 40: 70–80% stocks, 20–30% bonds
  • Age 55: 55–65% stocks, 35–45% bonds
  • Age 65: 40–60% stocks, 40–60% bonds
Important: These are starting points, not rules. Your actual allocation should reflect your risk tolerance, time horizon, other income sources (like Social Security or a pension), and overall financial situation — ideally discussed with a financial advisor.

A Simple Three-Fund Portfolio

Many index fund investors use a "three-fund portfolio" that covers the global market efficiently:

  1. U.S. Total Stock Market Fund (e.g., VTSAX or FZROX) — Core growth engine
  2. International Stock Market Fund (e.g., VXUS or FZILX) — Global diversification
  3. U.S. Bond Market Fund (e.g., BND or FXNAX) — Stability and income

The proportions depend on your asset allocation target. A 30-year-old might do 60% U.S. stocks, 30% international stocks, 10% bonds. A 60-year-old might do 40% U.S. stocks, 20% international, 40% bonds.

Rebalancing

Over time, market movements will shift your allocation away from your target. Rebalancing — selling assets that have grown above target and buying those below — brings your portfolio back in line. Most experts recommend rebalancing annually or when any allocation drifts more than 5% from its target.

Disclaimer: For educational purposes only. This is not financial advice. Consult a licensed financial advisor for personalized guidance on asset allocation.
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