Build a diversified portfolio by choosing a mix of stocks, bonds and cash that fits when you need the money and how much volatility or loss you can tolerate. Then diversify within each category, check for concentration, and rebalance under a consistent policy. There is no allocation that suits every investor.
Start with your goal, time horizon and risk tolerance
First identify what the money is for and when you expect to use it. The U.S. Securities and Exchange Commission (SEC) says asset allocation depends largely on time horizon and risk tolerance. A longer horizon may make it easier to tolerate volatile investments; a short-term goal may call for less risk. Its examples contrast saving for a down payment with investing for retirement, illustrating different circumstances rather than prescribing a particular mix. See the SEC guide to asset allocation and diversification.
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Consider both your willingness to endure market swings and your ability to absorb a loss without derailing the goal. Someone who would sell after a sharp decline may need a different mix from someone who can remain invested through one. Age alone does not settle the choice: two people of the same age can have different goals, time horizons and financial circumstances.
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| Category | General role and tradeoff | Important limitation |
|---|---|---|
| Stocks | Historically the riskiest of the three broad categories, with the greatest potential returns. | Prices can fluctuate substantially, and losses are possible; potential returns are not guaranteed. |
| Bonds | Generally less volatile than stocks, with more modest returns. | Risk varies by bond type; higher-risk bond categories are an exception to the broad comparison. |
| Cash and cash equivalents | Generally the safest of the three categories and useful for money needed soon. | Typically have the lowest returns and can lose purchasing power to inflation. No category is risk-free. |
These are broad historical descriptions from the SEC, not guarantees about future performance. Cash may preserve nominal value more reliably than investments that fluctuate, but a balance that grows more slowly than prices can buy less over time.
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Choose a target mix without treating an example as a recommendation
Decide how much exposure to each category makes sense for the goal, rather than copying a generic age-based rule. A short-term goal generally leaves less time to recover from a market decline; a long-term goal may allow greater exposure to assets with larger swings. The appropriate balance also depends on your tolerance for losses and your overall circumstances.
An SEC bulletin published in 2021 gives 50% stocks, 40% bonds and 10% cash as one common allocation example. That figure is an illustration in the bulletin—not an SEC recommendation or a prescribed portfolio for readers. See the SEC investor bulletin.
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Diversify both between and within categories
Asset allocation spreads a portfolio across stocks, bonds and cash; diversification also means spreading exposure within those categories. A stock portfolio concentrated in a few companies or one sector can remain vulnerable even if it contains several funds. Bond holdings can also be concentrated. The SEC’s guide includes stocks and stock funds, corporate and municipal bonds, bond funds, lifecycle funds, ETFs, money market funds and U.S. Treasury securities as examples of investment choices, not endorsements of particular products or providers.
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- Check overlap. Several funds may own many of the same largest companies or bonds. Count the underlying exposures, not just the number of funds.
- Review breadth. Consider whether holdings span companies, sectors, regions and bond types rather than relying heavily on a small set of issuers or one market segment.
The SEC describes diversification as the strategy of not putting all your eggs in one basket. It can reduce concentration risk, but it cannot eliminate investment risk or prevent losses.
Rebalance when your portfolio drifts
When categories perform differently, their shares of the portfolio change. Rebalancing means bringing the mix back toward the target you chose; it is a way to manage risk, not a forecast of which investment will do best next. The SEC describes several ways to do it:
- Sell some holdings in categories that have grown beyond target and use the proceeds to buy categories that have fallen below target.
- Use new money to buy underweight categories instead of selling holdings.
- Redirect ongoing contributions toward underweight categories until the mix is closer to target.
Selling may involve transaction fees or tax consequences, depending on your account and jurisdiction. Using contributions or other new money can be an alternative to selling. Review the SEC’s rebalancing guidance before choosing a method.
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Choose a review policy you can follow
Investor.gov describes two common approaches: review on a schedule—six or twelve months are examples some experts use—or rebalance when allocations cross preset percentage thresholds. These are options, not mandatory intervals. The guidance says rebalancing tends to work best relatively infrequently, rather than in response to every market move.
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Know what a target-date fund handles
A target-date fund’s adviser generally rebalances the holdings within the fund. Its allocation is typically intended to become more conservative as the target date approaches. This can reduce the need to rebalance those fund holdings yourself, but the fund’s allocation still needs to suit your goal and circumstances.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.Revisit the target if your circumstances change
A chosen mix is not permanent. A change in the goal, the date you expect to use the money, your risk tolerance or your financial circumstances may justify reconsidering the allocation. Review those factors before changing the target; do not alter it simply because one category recently performed better than another.
This is general educational information based on U.S. SEC investor materials, not individualized financial, tax or legal advice. Investment choices and tax treatment depend on your circumstances and jurisdiction.
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