How Much of My Money Should Be In Stocks vs. Bonds?

Stocks or bonds? Here are a few ways to split the funds up.

Man looking at 2 pie charts of his stock to bond mix.
Stocks or bonds? The right mix depends on your goals and risk tolerance. Buero Monaco / Taxi / Getty Images

When you build a portfolio, one of the first steps you must take is to determine how much of your money you want to invest in stocks vs. bonds. The right answer depends on many things including your experience as an investor, your age, and the investment philosophy that you plan on using.

For most people, it helps to take the approach that investing is for life, and your time horizon is life expectancy.

When adopting a long-term viewpoint, you can use something called strategic asset allocation to determine what percentage of your investments should be in stocks vs. bonds.

With a strategic asset allocation approach, you choose your investment mix based on historical measures of the rates of return and levels of volatility (risk as measured by short-term ups and downs) of different asset classes. For example, in the past stocks have had a higher rate of return than bonds (when measured over long time periods such as 15+ years), but more volatility in the short-term. 

The four allocation samples below are based on a strategic approach - meaning you are looking at the outcome over a long period (15+ years). When investing for life, you don't measure success by looking at returns daily, weekly, monthly, or even yearly; instead you look at the results over multiple year time periods.

1. Ultra Aggressive Allocation: 100% Stocks

If your goal is to achieve returns of 9% or more, you'll want to allocate 100% of your portfolio to stocks.

You must expect that at some point you will experience a single calendar quarter where your portfolio is down as much as -30%, and perhaps even an entire calendar year where your portfolio is down as much as -60%. That means for every $10,000 invested; the value could drop to $4,000. Over the course of many, many years, historically the down years (which happened about 28% of the time) should be offset by the positive years (which have occurred about 72% of the time).

2. Moderately Aggressive Allocation: 80% Stocks, 20% Bonds

If you want to target a long-term rate of return of 8% or more, you'll want to allocate 80% of your portfolio to stocks and 20% to cash and bonds. You must expect that at some point you will experience a single calendar quarter where your portfolio is down as much as -20%, and perhaps even an entire calendar year where your portfolio is down as much as -40%. That means for every $10,000 invested; the value could drop to $6,000. It is best to rebalance this type of allocation about once a year.

3. Moderate Growth Allocation: 60% Stocks, 40% Bonds

If you want to target a long-term rate of return of 7% or more, you'll want to allocate 60% of your portfolio to stocks and 40% to cash and bonds. You must expect that at some point you will experience a single calendar quarter and an entire calendar year where your portfolio is down as much as -20% in value. That means for every $10,000 invested; the value could drop to $8,000. It is best to rebalance this type of allocation about once a year.

4. Conservative Allocations: Less Than 50% in Stocks

If you are more concerned with capital preservation than achieving higher returns, then invest no more than 50% of your portfolio in stocks.

You will still have volatility and could have a year, or calendar quarter, where your portfolio is down as much as -10%.

And investors who want to avoid risk entirely need to stick with safe investments like money markets, CDs, and bonds, which means avoiding stocks altogether.

The allocations above provide a guideline for those who are not yet retired. The goal of an allocation model is to maximize returns while keeping the portfolio from exceeding a certain level of volatility, or risk. These allocations may not be right for you when you shift to retirement where you will need to take regular withdrawals from your savings and investments.

As you enter the decumulation phase, where you begin taking withdrawals, your investment goal changes from maximizing returns to delivering reliable income for life. A portfolio constructed to maximize returns may not be as effective at generating consistent income for life. Remember, as your life-phase and goals change, your portfolio needs to change. If you are near retirement, you'll want to check out some alternative approaches, as retirement investing need to be done differently at this stage of life. For example, in retirement, you might calculate the amount you need to withdraw over the next five to ten years, and that becomes the portion of your portfolio to allocate to bonds, with the remainder invested in stocks.

For all investors, it can be easy to get caught up in the latest trend, such as moving funds to gold, or technology stocks, or real estate. There is a benefit to having a portfolio designed on purpose rather than a portfolio designed on the latest fad. Stick with an allocation model, and you'll keep your portfolio out of trouble.