Best for: First-time investors who want to start with confidence, not confusion.
Asset allocation is just a fancy term for how you split your money between stocks and bonds. Sure there re other Assets, but these are the main 2 we focus on at RoostPoint.
Stocks go up and stocks go down a lot but grow more over time. Bonds are, most of the time, steadier but grow less. Your allocation determines how much your portfolio swings around and how much it’s likely to grow over the long run.
Get this right and you’ll sleep fine during market crashes. Get it wrong and you’ll panic sell at the bottom and lock in losses you can’t recover from.
The Rule of 120
Subtract your age from 120. That’s the percentage you should have in stocks. The rest goes to bonds.
If you’re 30, you should be 90% stocks and 10% bonds. If you’re 50, make it 70% stocks and 30% bonds. If you’re 70, you’re looking at 50% stocks and 50% bonds.
This is a starting point, not a law. But it’s a good starting point because it adjusts for the fact that older people have less time to recover from a market crash.
Why Age Matters (Sort Of)
When you’re young, you have decades for your portfolio to recover from downturns. If stocks crash 40%, that’s painful but not fatal. You keep buying stocks with every paycheck at lower prices, and when the market recovers, you benefit.
When you’re older, you don’t have decades. If you’re 65 and planning to retire soon, a 40% drop in your portfolio might force you to delay retirement or cut your spending. You need more stability, which means more bonds.
But age isn’t the only factor. Your income situation and portfolio size matter just as much.
Income Changes Everything
The rule of 120 assumes you’re working and earning money. If you’re not, the math changes.
Someone who’s 40 and employed can handle 80% stocks because they have a paycheck coming in. They’re not forced to sell during downturns.
Someone who’s 40 and unemployed with no other income? That same 80% allocation is a gamble. If the market drops and they need money to live on, they’re selling at the worst time.
If you don’t have income, you need more bonds than your age suggests. How much more depends on how long you expect to be without income and how large your emergency fund is.
Portfolio Size Matters Too
Someone with $3 million can weather a lot more volatility than someone with $200,000.
If you’re 60 with $3 million, you probably don’t need 40% in bonds. Even with zero income, you can keep a year or two of expenses in cash and ride out a market crash without touching your stocks.
If you’re 60 with $200,000, that 40% bond allocation makes more sense. You can’t afford to see half your portfolio disappear and still maintain your lifestyle.
The bigger your portfolio relative to your expenses, the more risk you can handle.
What Stocks and Bonds Actually Do
Stocks are ownership in companies. When companies grow and make profits, stock prices go up. Over long periods, stocks return about 10% per year on average. But in any given year, they might be up 30% or down 20%. You get higher returns in exchange for higher volatility.
Bonds are loans. You lend money to a government or a corporation, and they pay you interest. Bonds don’t grow as much as stocks, but they’re more stable. When stocks crash, bonds usually hold steady or even go up a little.
The reason you hold both is so you have something stable to sell when stocks aren’t cooperating. If your portfolio is 70% stocks and 30% bonds, and stocks drop 30%, you’re only down about 21% overall. And you can sell bonds to cover expenses instead of selling stocks at a loss.
How to Actually Allocate Your Portfolio
Pick your target allocation based on the rule of 120, adjusted for your income and portfolio size.
Then buy index funds that match that allocation.
If you want 80% stocks and 20% bonds, you might do:
- 80% VTI (U.S. stocks) or VTSAX (mutual fund version)
- 20% BND (U.S. bonds) or VBTLX (mutual fund version)
Or add international stocks:
- 50% VTI (U.S. stocks)
- 30% VXUS (international stocks)
- 20% BNDW (bonds)
Or go even simpler:
- 80% VT (total world stocks)
- 20% BNDW (bonds)
All of these work. Pick based on how much international exposure you want. The important thing is hitting your overall stock/bond split, not obsessing over the details.
When to Rebalance
Over time, your allocation will drift. If stocks have a great year, you might go from 70/30 to 75/25 without doing anything.
Once a year, check your allocation. If you’re off by more than 5%, rebalance by selling what went up and buying what went down.
This forces you to sell high and buy low without trying to time the market.
Do this in tax-advantaged accounts (401(k), IRA) when possible to avoid capital gains taxes. In taxable accounts, you can rebalance by directing new contributions to whatever’s low instead of selling.
What If You’re 100% Stocks?
Some people skip bonds entirely and go 100% stocks. This works if:
- You have a long time horizon (20+ years)
- You have steady income
- You have a solid emergency fund
- You won’t panic and sell during a crash
If all four of those are true, 100% stocks will probably get you more money in the long run. But if any of them aren’t true, bonds give you a cushion that might save you from a forced sale at the worst time.
Most people overestimate their risk tolerance. They think they can handle a 40% drop until it actually happens. Bonds are insurance against your own panic.
What If You’re Risk-Averse?
If the idea of losing 30% of your portfolio keeps you up at night, you need more bonds than the rule of 120 suggests.
A 50/50 portfolio won’t grow as fast, but it also won’t swing as wildly. During the 2008 crash, a 50/50 portfolio dropped about 22% while a 100% stock portfolio dropped 37%.
Would you rather have more money in the best years or sleep better in the worst years? There’s no wrong answer. Just be honest with yourself about what you can actually handle.
The Bottom Line
Asset allocation is about balancing growth and stability. More stocks mean more growth and more volatility. More bonds mean less growth and more stability.
Start with the rule of 120. Adjust for your income, portfolio size, and risk tolerance. Then pick simple index funds that match your target allocation.
Rebalance once a year to stay on track. And don’t change your allocation based on what you think the market is about to do.
You can’t predict the market. But you can build a portfolio you won’t panic out of when things get ugly.
And that’s what matters.