Asset allocation: the single most important choice

Research from the 1980s (Brinson, Hood, and Beebower) found that over 90% of the variability in portfolio returns came from asset allocation — the mix between stocks, bonds, and cash — rather than stock-picking or market timing. The exact percentage is debated, but the qualitative point has held up for 40 years: the mix matters more than the picks.

The core question

How much of your portfolio should be in stocks vs. bonds? Rough rule of thumb: for long-term money, stocks should be the bulk. For money you'll need in under 5 years, bonds and cash should be the bulk. In between, a gradient.

Rules of thumb (pick one to start)

• 110 minus your age = percent in stocks. A 30-year-old: 80% stocks, 20% bonds. A 60-year-old: 50/50.
• 120 minus your age: more aggressive, accounts for longer lifespans and lower bond returns. A 30-year-old: 90% stocks.
• Target-date funds do this for you automatically. If you pick a target-date 2060 fund in your 401k, it will glide from aggressive to conservative over decades without you touching it.

Diversification within stocks

Once you know your stock percentage, split it further: US stocks, international developed, and emerging markets. A common split is 60/30/10 or 70/20/10. The exact numbers don't matter much as long as you're not 100% concentrated in one country or sector.