Investment Allocation

⚠️ DISCLAIMER: I am not a financial advisor. This is not financial advice. These are notes on a system. Do your own research.

What is Asset Allocation?

Asset allocation is how you divide your investments among different asset classes—primarily stocks (equity) and bonds (fixed income). It’s the most important investment decision you’ll make, accounting for ~90% of long-term portfolio returns.

The good news: it’s simpler than the finance industry wants you to believe.

The Core Trade-Off

Asset Class	Expected Return	Volatility	Best For
Stocks	~7% (inflation-adjusted)	High	Long-term growth
Bonds	~2-3% (inflation-adjusted)	Low	Stability, income
Cash	~0% (inflation-adjusted)	None	Emergency fund, short-term

The principle: Stocks grow faster but fluctuate more. Bonds grow slower but fluctuate less. Your mix depends on your timeline and risk tolerance.

The Simple Formula

A common starting point:

Stock allocation = 110 - Your Age

Age	Stocks	Bonds
25	85%	15%
35	75%	25%
45	65%	35%
55	55%	45%
65	45%	55%

More aggressive: Use 120 - Age (more stocks) More conservative: Use 100 - Age (more bonds)

Why Age Matters

Young investors (20s-30s):

Decades until retirement
Can ride out market crashes
Human capital (future earnings) is bond-like
Should be heavily in stocks (80-100%)

Mid-career (40s-50s):

Still 15-25 years to grow
Some stability matters
Balanced approach (60-80% stocks)

Near/in retirement (60s+):

Need money soon
Can’t wait out crashes
Stability is critical
More bonds (40-60% stocks)

The math: if the market drops 50% when you’re 25, you have 40 years to recover. If it drops 50% when you’re 65, you might never recover before needing the money.

The Simplest Portfolios

You don’t need a complex portfolio. Here are three approaches that work:

1. Target Date Fund (Easiest)

What it is: One fund that automatically adjusts your allocation as you age.

How it works: Pick the fund closest to your expected retirement year (e.g., “Target 2055 Fund” if retiring around 2055). The fund handles everything—allocation, rebalancing, diversification.

Cost: 0.10-0.15% expense ratio at Vanguard/Fidelity/Schwab

Best for: Anyone who wants to set it and forget it.

2. Three-Fund Portfolio (Simple)

What it is: Three index funds covering the entire market:

Fund	Allocation	Example
US Total Stock Market	60%	VTSAX, FSKAX, SWTSX
International Stock	20%	VTIAX, FTIHX, SWISX
US Bond Market	20%	VBTLX, FXNAX, SWAGX

How it works: Buy these three funds in your chosen ratio. Rebalance annually.

Cost: 0.03-0.10% expense ratio

Best for: Those who want slightly more control and lower fees.

3. Two-Fund Portfolio (Simplest)

What it is: Two funds only:

Fund	Allocation	Example
Total World Stock	80%	VTWAX, VT
Total Bond Market	20%	VBTLX, BND

Cost: 0.06-0.10% expense ratio

Best for: Ultimate simplicity with global diversification.

Why Index Funds Win

The evidence is overwhelming:

~80% of active fund managers underperform their benchmark index over 15+ years
The average actively managed fund charges 0.5-1.5% vs 0.03-0.10% for index funds
That fee difference compounds to hundreds of thousands over a career

The math: $10,000 invested at 7% for 30 years

Index fund (0.05% fee): $74,000
Active fund (1.00% fee): $57,000

The index fund investor has 30% more money, just from lower fees.

What NOT to Do

1. Don’t Pick Individual Stocks

Unless you’re a professional investor spending 40+ hours/week on research, you’re gambling, not investing. Index funds give you the entire market’s return without the risk of picking losers.

2. Don’t Time the Market

“I’ll wait for the crash” or “I’ll sell before it drops” are fantasies. Studies show most market timing attempts reduce returns. Time IN the market beats timing the market.

3. Don’t Chase Performance

Last year’s hot fund is often next year’s loser. Past performance doesn’t predict future returns. Stick with your allocation regardless of recent performance.

4. Don’t Over-Diversify

Owning 10+ funds doesn’t reduce risk—it just adds complexity. A three-fund portfolio is already globally diversified across thousands of companies.

5. Don’t Check Too Often

Checking daily leads to emotional decisions. Check quarterly at most. Rebalance annually.

Rebalancing

Over time, your allocation drifts as some assets grow faster than others. Rebalancing brings it back to target.

Example:

Target: 80% stocks, 20% bonds
After a good year: 90% stocks, 10% bonds
Rebalance: Sell some stocks, buy bonds to return to 80/20

When to rebalance:

Calendar method: Once per year (simple)
Threshold method: When allocation drifts 5%+ from target

How to rebalance:

Contribute new money to the underweight asset (no selling needed)
In tax-advantaged accounts: Sell and rebuy freely
In taxable accounts: Minimize selling to avoid taxes

Tax-Efficient Placement

Different accounts have different tax treatment. Place assets strategically:

Asset	Best Location	Why
Bonds	Tax-advantaged (401k, IRA)	Interest is taxed as income
International stocks	Taxable	Foreign tax credit available
US stocks	Either	Qualified dividends taxed lower
REITs	Tax-advantaged	Dividends taxed as income

Simple version: Put bonds in retirement accounts, stocks wherever.

Account Priority

Where you invest matters as much as what you invest in. See Tax-Advantaged Accounts for details, but the order is:

401(k) to employer match — Free money
HSA max — Triple tax advantage
Roth IRA max — Tax-free growth
401(k) to max — Tax-deferred growth
Taxable brokerage — After tax-advantaged space is full

Common Questions

'Should I invest now or wait for a crash?'

Invest now. Historically, markets go up more than they go down. Waiting for a crash means missing gains. Even investing at the worst possible moment (market peaks) beats waiting in cash over long periods.

'What about real estate / crypto / gold?'

These are optional tilts, not core holdings:

Real estate: Already in total stock market (REITs). Direct ownership is a job, not passive investing.
Crypto: Highly speculative. If you want exposure, limit to less than 5% of portfolio.
Gold: Historically returns less than stocks with similar volatility. Not recommended for core allocation.

A simple stock/bond portfolio is sufficient for most investors.

'Should I hire a financial advisor?'

For basic investing, probably not. A simple index fund portfolio requires no professional help.

Consider an advisor if:

You have complex tax situations
You need help with estate planning
You lack discipline to stay the course
You have >$1M and want comprehensive planning

If you do hire someone, use a fee-only fiduciary (paid hourly or flat fee, legally required to act in your interest). Avoid advisors who earn commissions on products.

The Investing Checklist

Emergency fund: 3-6 months expenses in cash
Employer match: Contributing enough to get full match
Asset allocation: Decided based on age/timeline
Investment selection: Low-cost index funds or target date
Rebalancing plan: Annual check
Automation: Auto-contributions set up
Don’t touch it: Ignore short-term fluctuations

The Bottom Line

Investment allocation is:

Simple — Target date fund or 3-fund portfolio
Age-based — More stocks when young, more bonds when older
Low-cost — Index funds beat most active funds
Hands-off — Set it, forget it, rebalance annually

The best portfolio is the one you’ll stick with through market ups and downs. Complexity doesn’t improve returns—simplicity and consistency do.

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