Stock market basics · updated October 21, 2026
What is asset allocation and how do you choose it
Asset allocation is the decision about what percentage of your money goes into stocks, bonds, cash and other assets. Studies show it explains most of how much a portfolio rises and falls.
How it works
You choose it based on three things: in how many years you will need the money, how big a drop you can sit through without selling, and what other income you have. The longer the horizon, the more stocks you can hold. Once chosen, you keep the allocation through rebalancing, not by changing it after the day's news.
Worked example
Compare three allocations in a year when stocks fall 30% and bonds rise 2%:
For 60 / 40: 0.6 × (−30%) + 0.4 × 2% = −17.2%. In good years, the allocations with more stocks earn more.
Worth knowing
An old rule says to hold a percentage of bonds equal to your age. It is a starting point, not a law: many now see it as too cautious for young people.
When asset allocation can fool you
Switching with the market: whoever moves to cash after a fall and comes back after the rebound misses exactly the good part. Risk on paper is not risk you live through: a 30% drop feels much worse than it looks in a table.
Related terms
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Questions about asset allocation
What allocation is right for you?
It depends on your horizon and on how well you sleep when the market falls. For money you need in 2-3 years, stocks are usually too risky.
What is a 60/40 portfolio?
60% stocks and 40% bonds. It is a classic allocation, balanced between growth and stability.
These explanations are for information only. They are not a recommendation to buy or sell.
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