As an investor, your asset allocation is one of the biggest factors in your success. This is the ratio of different assets you have in your portfolio. Most investors have a mix of stocks, bonds, and cash, which are the three main types of assets.
Asset allocation isn't something to gloss over, because getting it wrong can have serious consequences. For example, if you're a young investor and you have more money in bonds than in stocks, that will significantly limit your returns over the years. Or, if you're near retirement and you have a very stock-heavy portfolio, it could be too volatile at a time when what you really need is stability.
So, what should you aim for? Expert Ramit Sethi, the star of How to Get Rich on Netflix, previously shared his own asset allocation and recommendations you can follow based on your age.
Read more: unlock best-in-class perks with one of these brokerage accounts
How Ramit Sethi invests
Sethi shared his personal asset allocation in an Instagram post on Nov. 13, 2020. At that time, his portfolio was:
- 85% stocks
- 13% bonds
- 2% cash equivalents
That's a stock-heavy portfolio, but it makes sense for Sethi's age. He was 38 years old when he shared his asset allocation, still nearly three decades from the traditional retirement age.
With so much time until retirement, stocks are one of the best investments you can make. Stocks have historically outperformed most other assets. They've delivered an average return of about 10% per year before inflation.
The biggest drawback with investing in stocks is volatility. Returns can fluctuate quite a bit on a year-to-year basis. When you have a long time left until retirement, that volatility isn't an issue. As long as you stay invested, you can ride out the ups and downs, and your portfolio will most likely see good long-term growth.
Sethi's recommended asset allocation by age
Your asset allocation isn't a one-time decision. It's something you need to adjust as you age so that it fits your current stage of life. Here's what Sethi recommends each decade, from 35 to 65, based on figures taken from Vanguard's target-date funds:
- Age 35: 90% stocks, 10% bonds
- Age 45: 90% stocks, 10% bonds
- Age 55: 69% stocks, 31% bonds
- Age 65: 53% stocks, 47% bonds
These are all reasonable recommendations if you're planning to retire in your mid to late 60s. Until your late 40s, most of your money should be in stocks to maximize growth. As you get into your 50s and 60s, it's time to start shifting your portfolio more to bonds, which are a more conservative investment. They won't provide as much growth, but they will help protect you from losses.
You may have noticed that these recommendations don't mention cash. Cash doesn't always fit neatly into asset allocation. As a general rule, everybody should aim to have an emergency fund that can cover three to six months of living expenses. If you're also saving to buy a house, then you'll likely end up having a much higher cash allocation than someone who isn't.
It often makes sense to figure out your asset allocation and your cash needs separately. Decide on the ratio of stocks and bonds you want, and then set separate cash savings goals for your emergency fund and any major expenses you're planning for.
There's room for some flexibility in your asset allocation
For most investors, it's not a good idea to veer too far from those recommendations. Your asset allocation is ultimately up to you. But if you're 25 and have your entire portfolio in bonds, that's going to end up costing you a lot of money.
Your asset allocation also depends on your risk tolerance, though. For example, investors who don't mind more volatility tend to go with higher stock allocations. Some younger investors, myself included, go with 100% stocks and no bonds to prioritize growth. And there are other types of assets out there, such as real estate, which you can invest in easily through REITs. Many investors have more than just stocks and bonds in their portfolio.
Still, as you can see by Sethi's investments, asset allocation doesn't need to be complicated. He's a personal finance expert and a millionaire many times over, and he sticks to a widely recommended mix of stocks and bonds.
Alert: our top-rated cash back card now has 0% intro APR until 2025
This credit card is not just good – it’s so exceptional that our experts use it personally. It features a lengthy 0% intro APR period, a cash back rate of up to 5%, and all somehow for no annual fee! Click here to read our full review for free and apply in just 2 minutes.
