Asset Allocation
First Seen: November 2010 · Concept: Modern Portfolio Theory (1952) · Status: Fundamental investing principle
Overview
Asset allocation is distribution of investments across asset classes (stocks, bonds, real estate, cash) to balance risk and return based on goals, timeline, and risk tolerance.
Core premise: Diversification across uncorrelated assets reduces portfolio volatility without sacrificing returns.
Common Allocations
Aggressive (young investors):
- 90% stocks, 10% bonds
- 100% stocks (FIRE community debates this)
Moderate (mid-career):
- 70% stocks, 30% bonds
- 60% stocks, 40% bonds
Conservative (near retirement):
- 40% stocks, 60% bonds
- 30% stocks, 70% bonds
Rule of thumb: Stock allocation = 120 - age (e.g., 30 years old = 90% stocks, 60 years old = 60% stocks). FIRE community pushes more aggressive (110-age or 100-age).
Bogleheads Three-Fund Portfolio
Simplest allocation:
- US Total Stock Market (VTSAX/VTI) — 50-70%
- International Total Stock (VTIAX/VXUS) — 20-30%
- Total Bond Market (VBTLX/BND) — 10-30%
Rebalancing
Purpose: Maintain target allocation as markets move
Methods:
- Annual rebalancing (once per year)
- Threshold rebalancing (when allocation drifts 5%+)
- New contributions (direct new money to underweight assets)
Tax considerations: Rebalance in tax-advantaged accounts (401(k), IRA) to avoid capital gains taxes
Criticism
Bond allocation debate: FIRE community questions bonds (low returns 2010-2021). “Why hold bonds earning 1% when inflation is 2-8%?”
International allocation: Some advocate 100% US stocks (US has outperformed international 2010-2023), others cite diversification necessity
Sources
- Modern Portfolio Theory (Harry Markowitz, 1952)
- Bogleheads asset allocation wiki
- r/Bogleheads allocation discussions