Video Lesson
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What Is Asset Allocation and Why Does Age Matter?
Asset allocation is arguably the most important investment decision you'll make — more important than which stocks you pick. How you divide your money between stocks, bonds, and cash determines both your long-term returns and your volatility. Younger investors can afford more risk; time smooths out downturns. Older investors need stability — a crash near retirement can be devastating.
The Classic Rule: 100 Minus Your Age
Subtract your age from 100 to get your stock percentage. A 30-year-old would hold 70% stocks and 30% bonds. With people living longer, many advisors now use 110 or 120 as the base — a 30-year-old using 110 minus age would hold 80% stocks.
The Glide Path: Shifting Allocation Over Time
- 20s–30s: 80–90% stocks, 10–20% bonds — maximum growth phase
- 40s: 70–75% stocks, 25–30% bonds — moderating risk
- 50s: 60% stocks, 40% bonds — protecting accumulated wealth
- Retirement: 40–50% stocks, 50–60% bonds — stability focus
Target Date Funds: Automatic Glide Path
Target date funds do all of this automatically. You pick the fund matching your expected retirement year — e.g. Target Date 2055 — and it gradually shifts from stocks toward bonds as that date approaches. They are an excellent default choice for 401k investors who want a complete, self-managing portfolio.
Building Your Own Glide Path
A simple three-fund portfolio — a total market ETF, an international ETF, and a bond index — covers all you need. Set your target allocation based on your age, rebalance annually, and shift toward bonds as you approach retirement. Consistent execution matters far more than perfecting the percentages.