Learn › Basics › Asset Allocation
Core conceptYou can pick great ETFs, understand compounding, and still end up with a portfolio that doesn’t feel right if your asset allocation is off. Asset allocation is simply how you divide your money between stocks, bonds, cash, and other assets—but it’s one of the biggest drivers of your long-term results.
This guide walks through what asset allocation is, why it matters so much, how to choose the right mix for your situation, and how to keep it on track over time. By the end, you’ll know how to turn “I own some investments” into “I have a coherent portfolio.”
If you haven’t yet read Investing 101 and ETFs Explained, those are perfect big-picture companions to this page.
Asset allocation is the process of deciding what percentage of your portfolio goes into each type of investment. At the simplest level:
For example, a common starting point is:
Two people could own the exact same ETFs but feel very different about their portfolios because their mixes are different. Your allocations shape how your portfolio behaves in both good and bad markets.
Many investors focus on finding “the right stock” or “the next big ETF.” In practice, research suggests that:
Imagine two investors during a rough year for stocks:
| Investor | Mix | Stock Market Return | Approx. Portfolio Return |
|---|---|---|---|
| Aggressive | 100% stocks | -20% | -20% |
| Balanced | 60% stocks / 40% bonds | -20% stocks, +2% bonds | ≈ -11% |
Same market, very different emotional experience. An investor who panics at -20% but can live with -10%+ may need a more balanced allocation. It’s the mix that controls this, not whether they picked ETF X or ETF Y.
Most asset allocation decisions start with three main building blocks:
For most individuals, the most important decision is simply the split between stocks and bonds, with cash handled separately for emergencies and short-term goals.
A sensible allocation balances three things:
The longer your money can stay invested, the more sense it makes to hold a higher percentage in stocks.
Risk tolerance is about your emotional relationship with volatility. Some people can watch a portfolio fall 25% and stay calm; others lose sleep at a 5% drop.
Risk capacity is about your financial ability to handle loss, independent of emotions.
There is no perfect formula, but sample allocations help you see how things fit together. These are not recommendations—they’re starting points to think through your own mix.
| Investor Profile | Stocks | Bonds | Cash (outside portfolio) |
|---|---|---|---|
| Early career, long runway | 90–100% | 0–10% | 3–6 months expenses |
| 30s–40s, building family wealth | 70–85% | 15–30% | 3–6 months expenses |
| 50s, planning retirement | 60–75% | 25–40% | 6–12 months expenses |
| 60s+, spending from portfolio | 40–60% | 40–60% | 12+ months essential expenses |
Again, these ranges aren’t strict rules, but they show the pattern: as you move from net saver to net spender, the bond and cash portions often rise to help manage sequence-of-returns risk (the risk of encountering a big downturn right as you start withdrawals).
You’ll often see shorthand like “60/40” in investing discussions. This is just a quick way of expressing stock/bond splits.
Your asset allocation doesn’t need to be frozen forever. In fact, it often makes sense to adjust it gradually as you move through life.
A glidepath is a plan for how your stock/bond mix will change over time, usually becoming more conservative as you approach retirement or a major goal.
You can implement this manually by changing your allocation every 5–10 years, or you can use certain all-in-one ETFs or target-date funds that manage the glidepath for you.
Once you know your target mix, you still need specific investments to fill each bucket. ETFs make this straightforward.
Say your target is 80% stocks / 20% bonds. You might implement it like this:
| Bucket | ETF Type | Example Weight |
|---|---|---|
| Domestic stocks | Broad-market equity ETF | 50% |
| International stocks | Global ex-domestic ETF | 30% |
| Bonds | Aggregate bond ETF | 20% |
Within each account (TFSA/RRSP/IRA/401k/taxable), you hold these ETFs in proportions that add up to your overall target.
For a deeper dive on the building blocks, see: → ETFs Explained
Markets move. Without intervention, your portfolio will drift away from your target allocation. Rebalancing is the process of nudging it back.
If stocks outperform bonds for several years, a 70/30 portfolio might quietly drift to 80/20 or 85/15. That means more risk than you originally intended.
Target: 70% stocks / 30% bonds. Current: 78% stocks / 22% bonds.
A mathematically “optimal” allocation is useless if you can’t stick with it when markets get rough. Comfort matters more than squeezing out an extra fraction of a percent in backtests.
Investors often shift into whatever did best in the last few years (stocks, tech, real estate) just in time for a reversal. A consistent target allocation helps avoid this.
Cash feels safe, but for retirement 20–30 years away, it virtually guarantees that inflation will eat purchasing power. Some exposure to growth assets is usually necessary.
Randomly collecting funds and ETFs without a clear target mix leads to an accidental allocation. You might think you’re diversified, but in reality, you may be overexposed to one region or sector.
Tweaking your mix every time markets move is a form of market timing. Asset allocation should change slowly and intentionally, not reactively.
If you have a large cash buffer for emergencies and near-term spending, you may be able to tolerate a more growth-oriented portfolio allocation than you think. Look at your whole picture, not just your brokerage account.
Before committing to a mix, it can help to play with different scenarios and see how they might behave.
Asset allocation is the process of deciding how your portfolio is divided among different asset classes such as stocks, bonds, and cash. It shapes how much your portfolio can grow and how much it may fluctuate along the way.
Consider your time horizon (when you’ll need the money), your emotional comfort level with volatility, and your financial capacity to handle losses. Younger investors with long horizons often hold more stocks; those nearing retirement often hold more bonds and cash.
The 60/40 portfolio remains a reasonable starting point for many balanced investors, but it’s not magic or mandatory. Your ideal mix may be more aggressive or more conservative depending on your goals and circumstances.
Not necessarily. You can think in terms of your total portfolio, then hold different assets in different accounts for tax efficiency (for example, more bonds in tax-advantaged accounts, more equities in taxable, depending on your jurisdiction). But the combined picture should match your target allocation.
At least once a year, or when you experience major life changes (marriage, children, job change, inheritance, nearing retirement). Revisit doesn’t always mean change—often the best answer is “stay the course” if your plan still fits your reality.