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Diversify by choosing a stock, bond and cash mix that fits when you need the money and how much investment fluctuation you can tolerate, then spread holdings within each category and rebalance when the mix drifts. There is no stock/bond/cash percentage that is right for everyone: the SEC says allocation depends largely on time horizon and risk tolerance.
Start with the goal, not a stock/bond percentage
For each investment goal, identify when you expect to use the money and how much loss or volatility you could withstand without abandoning the plan. A longer time horizon may make it easier to tolerate market swings; a shorter horizon may call for less risk. The mix may also need to change as the goal approaches. The SEC’s Beginners’ Guide to Asset Allocation, Diversification, and Rebalancing describes the decision as depending largely on time horizon and ability to tolerate risk.
Age can inform a decision, but it is not a substitute for considering when the money is needed, other resources and your response to losses. Nor should recent market performance alone dictate a change: that can lead to buying after gains or selling after declines rather than following a considered plan.
Understand what stocks, bonds and cash can—and cannot—do
| Category | Potential role | Risks and limits |
|---|---|---|
| Stocks | Growth potential over time; among these three categories, the SEC describes stocks as having the greatest risk and potential returns. | Prices can fluctuate substantially, and potential returns are not guaranteed. |
| Bonds | Generally less volatile than stocks, with more modest returns, and can provide income. | Risk varies by issuer and bond type. High-yield, or “junk,” bonds can carry higher risk, so bonds should not all be treated as cash substitutes. |
| Cash and cash equivalents | Generally low investment-loss risk and useful access to money. | Returns tend to be low, and inflation can erode purchasing power over longer periods. |
These are broad descriptions, not promises about how any particular holding will perform. Allocation and diversification may help manage risk, but they do not eliminate it or guarantee a return.
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Diversify within each category, not just between them
Owning some stocks, bonds and cash does not by itself make a portfolio broadly diversified. A portfolio can still depend heavily on one company, issuer, industry or type of security within a category. Consider how holdings are spread within each part of the portfolio, as well as across the three categories.
Mutual funds and exchange-traded funds can make it easier to hold a range of investments, but the fund label alone does not guarantee diversification. A narrowly focused fund may leave a portfolio concentrated. Check what a fund holds and how those holdings overlap with the rest of the portfolio.
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Use examples as illustrations, not prescriptions
In an April 28, 2021 municipal-bond bulletin, the SEC used 50% stocks, 40% bonds and 10% cash as one example of an allocation. It is an illustration, not a recommendation for every investor or goal; your appropriate mix depends on your circumstances and tolerance for risk.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.Review the mix and rebalance when it drifts
Because categories can perform differently, their shares of a portfolio change over time. Rebalancing brings the portfolio closer to its intended risk mix. It does not ensure a profit or prevent losses.
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You can review on a calendar schedule or when an allocation crosses a threshold you set in advance. Investor.gov says some experts use six- or twelve-month intervals and notes that rebalancing generally works best relatively infrequently. FINRA says there is no official timeline and suggests considering an annual review. These are approaches to consider, not mandatory schedules.
Ways to rebalance
- Sell some holdings in categories that have grown beyond their intended share and use the proceeds to buy categories that have fallen below it.
- Direct new contributions toward underweight categories instead of selling existing holdings.
- Use a combination: direct contributions to underweights and sell overweight holdings if contributions alone do not bring the mix closer to plan.
Before selling in a taxable account, consider possible capital-gains taxes and transaction costs. The consequences depend on the account and your circumstances; using new contributions may avoid a sale, though it may not be sufficient to restore the intended mix.
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