Money strategies · Investing

Asset allocation and rebalancing

Asset allocation is how you split your money between types of investments: mainly shares, bonds and cash. It sounds technical, but it's the most important investing decision you will make: it decides how much your portfolio can grow, and how far it can fall in a bad year.

👴 In one sentence Pick a mix of shares and bonds you can live with in a crash, then once a year put it back to that mix.

The three building blocks

📈 Shares (stocks)

Ownership of companies. The highest long-term growth, but falls of 30–50% happen. The engine of the portfolio. See what is a stock?

📜 Bonds

Loans to governments and companies. Lower growth, much smaller falls. The brakes. See what is a bond?

💵 Cash

Savings accounts and money market funds. Safe and available, but barely beats inflation over time. The spare tyre: your emergency and sinking funds.

🥇 Others

Property, gold, commodities. Optional, and usually a small part for private investors.

Risk and return: what history shows

Vanguard publishes how different mixes did in the US since 1926. The figures below are rounded, before inflation and fees, and the past does not guarantee the future, but the pattern is very clear: more shares means more growth, and deeper falls.

Mix (shares / bonds)	Average return per year	Worst single year	Feels like
100 / 0	about 10%	about −43%	A roller coaster
80 / 20	about 9.5%	about −35%	Steep hills
60 / 40	about 9%	about −27%	The classic "balanced" portfolio
40 / 60	about 8%	about −18%	Gentle hills
0 / 100	about 5–6%	about −13% (2022)	A quiet road, with a few bumps

The question is not "which mix earns most?" (100% shares, usually) but "which mix will I hold on to when it is down 30%?" A portfolio you sell in a panic earns less than a calmer one you keep.

How to choose your mix

Three questions decide it:

When do you need the money? Money for the next 1–3 years belongs in cash (see sinking funds). Money for 5–10 years can be partly in shares. Money for 20+ years, like retirement, can be mostly in shares.
Can you afford a fall? A stable job, an emergency fund and no expensive debt mean you can take more risk.
Can you stand a fall? Imagine seeing $10,000 become $6,000 on your screen. If you would sell, choose fewer shares.

Rule of thumb: % in shares ≈ 110 − your age

At 30 that's 80% shares and 20% bonds; at 60, 50/50. It's only a starting point: a 30-year-old who would panic in a crash may prefer 60/40, and a 60-year-old with a good pension can take more.

💡 The lazy option: target-date and all-in-one funds Many fund providers sell a single fund that holds shares and bonds in a fixed mix (for example 80/20) and rebalances by itself, or a target-date fund ("Retirement 2055") that slowly moves from shares to bonds as the date gets closer. One fund, no maintenance. Check the yearly fee.

Diversify inside each block

Allocation is not only shares vs bonds. Inside the share part, owning thousands of companies in many countries (a global index fund) protects you from one company, sector or country going wrong. Investors who held only Japanese shares in 1989 waited more than 30 years for the Nikkei index to get back to its peak. See funds, risk & interest rates.

Rebalancing: back to your mix

Markets move, so your mix drifts. After a good year for shares, an 80/20 portfolio may become 88/12: riskier than you chose. After a crash it may become 70/30. Rebalancing means selling a little of what went up and buying what went down, to get back to your target.

Example: Sam rebalances through a crash

Sam has $10,000 at 80/20. Then shares fall 30%, bonds rise 5%, and a year later shares recover to where they started.

Sam's portfolio in $

Start: 8,000 shares + 2,000 bonds10,000

80% / 20%: Sam's chosen mix.

After the crash: 5,600 shares + 2,100 bonds7,700

Shares are now only 5,600 ÷ 7,700 = 73%. The mix has drifted.

Rebalance: target shares = 80% × 7,7006,160

Sam sells $560 of bonds and buys $560 of shares: buying low, exactly when it feels hardest.

Recovery, with rebalancing: 8,800 + 1,54010,340

Shares rise back by 10/7 (from 5,600 to 8,000 for the market), so Sam's 6,160 becomes 8,800. Bonds stay flat.

Recovery, without rebalancing: 8,000 + 2,10010,100

The same markets, but no action in the crash.

Extra from rebalancing+240

Not a guarantee (if shares had kept falling, rebalancing would have lost a little), but it keeps the risk where Sam chose it, with a rule instead of emotions.

Three ways to rebalance

Method	How	Good for
Calendar	Once a year, on a fixed date (your birthday, January 2nd), reset to target.	Simplicity: most people
Threshold	Rebalance only when a part is more than 5 percentage points off (e.g. shares above 85% or below 75%).	Fewer trades, reacts to big moves
With new money	Put each month's new savings into whatever is below target. No selling.	People still saving: no taxes, no extra fees

⚠️ Taxes and fees Selling can create a taxable gain in a normal brokerage account. Rebalancing inside a tax-advantaged retirement account, or with new money, avoids it. Don't rebalance every week: once a year is plenty.

✏️ Check yourself: Ioana wants 60/40. After a strong year she has $13,000 in shares and $7,000 in bonds. What should she do?

Show the answer

Her total is $20,000, so her target is 60% × 20,000 = $12,000 in shares and $8,000 in bonds. Today shares are 13,000 ÷ 20,000 = 65%. She can sell $1,000 of shares and buy $1,000 of bonds, or, if she is still saving, put her next $1,000+ of savings into bonds only.