iTechGuides is reader-supported. When you buy through links on our site, we may earn an affiliate commission. As an Amazon Associate I earn from qualifying purchases. Learn more
There is no single stock, bond, and cash mix that suits every investor. Start with the goal for the money, when you expect to need it, and how much fluctuation or loss you can tolerate. Then diversify within each category and review the mix periodically so market movements do not leave your portfolio far from the plan.
Choose an allocation for a specific goal
Asset allocation is the division of a portfolio among broad categories such as stocks, bonds, and cash equivalents. The right balance depends mainly on the goal’s time horizon and your ability and willingness to accept risk. The SEC puts it this way: “The asset allocation that works best for you at any given point in your life will depend largely on your time horizon and your ability to tolerate risk.” See the SEC’s Beginners’ Guide to Asset Allocation, Diversification, and Rebalancing.
A longer horizon may give you more time to ride out market fluctuations; money needed sooner may call for less exposure to volatile investments. As a goal approaches, consider whether the mix still matches the amount of risk you can afford to take. Age alone or recent market performance does not determine a suitable allocation: the money’s purpose, timing, and your response to losses matter too.
Quick wins for a faster PC:
Repair Windows errors before they cause bigger problemsFix Now →Scan for outdated or missing drivers - takes under a minuteDriver Scan →Clear out junk files and repair common Windows errorsFree Scan →Understand what stocks, bonds, and cash contribute
| Category | Typical role and trade-off | Risks to keep in view |
|---|---|---|
| Stocks | Growth potential; among these three categories, the SEC describes stocks as having the greatest risk and potential returns. | Prices can fluctuate substantially, and returns are not guaranteed. |
| Bonds | Generally less volatile than stocks, with more modest returns. | Risk varies by bond type and issuer. High-yield, or “junk,” bonds can carry greater risk, so bonds are not all cash-like or low-risk. |
| Cash equivalents | Generally lower investment-loss risk and lower return, with liquidity and relative stability. | Inflation can erode purchasing power over longer periods; low investment-loss risk does not mean no risk. |
These are broad descriptions, not guarantees. Asset allocation and diversification can help manage risk, but neither eliminates it or guarantees a return.
Diversify within each category, not just across them
Owning some stocks, bonds, and cash does not automatically make a portfolio well diversified. A portfolio can still depend heavily on a narrow slice of one category—for example, a small number of companies or one type of bond. Consider how the underlying holdings are spread across issuers, sectors, and bond types, as relevant to the investment.
Mutual funds and exchange-traded funds can make it easier to hold a range of investments, but the fund label alone is not proof of diversification. A narrowly focused fund may remain concentrated. Review what a fund actually holds and how those holdings overlap with the rest of the portfolio.
Treat sample percentages as illustrations, not prescriptions
There is no universal percentage to assign to each category. The SEC’s municipal-bond bulletin dated April 28, 2021, gives 50% stocks, 40% bonds, and 10% cash as an example of a common allocation. It is an illustration, not a recommendation for every investor. The mix appropriate for a particular goal still depends on its time horizon and the investor’s capacity and willingness to take risk. See the SEC municipal-bond bulletin.
Review the portfolio and rebalance when it drifts
When investments perform differently, their shares of the overall portfolio change. Rebalancing brings those weights back toward the allocation chosen for the goal. It restores the intended risk mix; it does not ensure a profit or prevent losses.
Common approaches include:
- Sell part of holdings that have grown above their target weight and use the proceeds to buy holdings that are below theirs.
- Direct new contributions toward underweight holdings, avoiding or reducing the need to sell.
- Combine sales with contribution changes to move the portfolio closer to its target.
You can review on a calendar schedule or check when a holding crosses a threshold you set in advance. These are approaches rather than fixed rules. Investor.gov notes that some experts use six- or twelve-month intervals and that rebalancing generally works best relatively infrequently. FINRA says there is no official schedule and suggests considering an annual review in its Asset Allocation and Diversification guidance.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.Check taxes and costs before selling
Selling investments to rebalance may create transaction costs and, in a taxable account, potential capital gains taxes. The consequences depend on the account and your circumstances. Using contributions to buy underweight holdings may be an alternative to selling, though it may not be enough to restore the intended mix on its own.
Quick Recap
Product prices and availability are accurate as of the date/time indicated and are subject to change. Any price and availability information displayed on Amazon at the time of purchase will apply.
Recommended Free Tools
