Asset Allocation
The stocks/bonds/cash split — the decision that explains most of a portfolio's risk and return.
The Core PrinciplesBeginner 5 min read· Lesson 13 of 13 in Investing Fundamentals
Why it dominates
Studies consistently find the asset-class mix explains the large majority of a portfolio's variability — far more than which particular stocks you picked. Stocks drive growth; bonds dampen swings and fund rebalancing; cash covers near-term needs so you're never a forced seller.
Choosing a mix
The classic starting point: equity share scales with time horizon and stomach. Long horizon + tolerance for 30–50% drawdowns → equity-heavy (80–100%). Nearing the money's use date → shift toward bonds/cash. Rebalancing back to target once a year systematically sells high and buys low.
The honest test
Your maximum equity allocation is the one you can hold through a 40% drawdown without selling. The best allocation on paper is worthless if panic overrides it in practice.