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4 Asset Allocation Rules You Should Know by Heart

By Maurie Backman – Feb 9, 2020 at 9:02AM

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These tips can help you map out a solid financial plan.

Your assets can come in a few different forms -- stocks, bonds, and even cash, to name some popular ones. But how much of your money should you allocate to each category? The ultimate answer depends on your personal goals (meaning what you want to use that money for) and appetite for risk, but here are a few general rules that will help you narrow down your choices.

1. If you need the money within seven years, don't put it in stocks

The stock market is extremely volatile, which means that if you buy stocks and then need to sell them within a few years, you'll risk taking losses. That's why it's generally not a good idea to invest money you plan to use within seven years in stocks. Though the market has a solid history of rebounding from downturns, that may not be a long enough window to see that recovery through without taking losses.

Man holding pen over pie chart

IMAGE SOURCE: GETTY IMAGES.

Here's another way to think about it. If you're saving money for an emergency fund or a down payment on a home you want to buy in the next few years, then you'd be wise to keep that money in cash. But if you're saving for retirement, stocks are a good way to go, since that generally means you'll have multiple decades to ride out market fluctuations.

2. Use the rule of 110 when filling your portfolio with stocks

It's good to diversify your long-term savings (such as the money you have earmarked for retirement), which means you may not want to put your entire nest egg into stocks. So what percentage should you choose? A good way to land on the right number is to subtract your age from 110. If you're 30 years old, that means you'd put 80% of your assets into stocks. If you're 60 years old, you'd put 50% into stocks. Of course, there's wiggle room with this formula, but you can use it as a baseline.

3. Diversify within each asset class you invest in

Whether you're loading up on stocks, bonds, or both, you don't want to put all of your eggs in one basket. Rather, it's important to diversify so that if a single stock or segment of the market takes a hit, your entire portfolio won't sink.

Let's imagine you've decided to put the bulk of your money into stocks. From there, you might buy up three or four health stocks, another three or four auto stocks, and a handful of bank stocks. That way, if bank stocks crash but the rest of the market holds steady, your potential losses will be minimized.

On top of that, you may want to put some of your money into index funds, which offer built-in diversification. Index funds track existing market indexes, like the S&P 500, and as such, they largely take the guesswork out of investing.

4. Retain stocks in your portfolio even during retirement

Many seniors assume that once they're retired, they should dump their stocks and stick to safer investments only, like bonds. The problem with that approach, however, is that you still want to generate decent growth in your retirement account to allow for higher withdrawals. And if you get rid of stocks completely, that growth will be stunted. As such, the rule of 110 can continue to apply in retirement. If you're 75 years old, you can keep about one-third of your savings in stocks, but feel free to invest the rest in bonds to limit your exposure to market volatility. Of course, if you have a healthy appetite for risk, even in retirement, a 50/50 stock-bond split could also serve you very well.

Knowing how to divvy up your assets could set the stage for financial success, both now and in the future. Remember, there's no single right or wrong way to allocate yours, but the above rules should serve as a solid starting point.

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