Asset allocation is how you divide your portfolio among asset classes, mainly stocks, bonds and cash. Research suggests it explains most of the variation in portfolio returns over time.
Stocks, bonds and cash
Stocks offer higher expected growth with higher volatility. Bonds typically provide income and cushion declines. Cash gives stability and liquidity but low returns. The right mix depends on your goal, time horizon and ability to stomach losses.
Rules of thumb
A traditional rule subtracts your age from 110 or 120 to estimate a stock percentage. Target-date funds do this automatically, shifting toward bonds as the target year nears. These are starting points, not guarantees.
Rebalancing
As markets move, your mix drifts. Rebalancing once a year, or when allocations drift beyond about five percentage points, sells what grew and buys what lagged to restore your target risk level. Use new contributions or tax-advantaged accounts to avoid taxes.
Try the numbers
Use our Investment Return (CAGR) Calculator to see this in practice. With its default example (Starting value: $10,000; Ending value: $24,000; Years held: 8), it shows cagr: 11.56%. Adjust the inputs to match your situation.
Key takeaways
- Your mix of assets drives risk and return.
- Time horizon and risk tolerance guide the split.
- Rebalance periodically to maintain your target.
This article is for general education and is not personalized financial, tax or legal advice. Rules and limits change; confirm current figures with official sources such as IRS.gov, SSA.gov and StudentAid.gov, or consult a qualified professional. © 2026 FinanzCalc.