What Percentage of Your Net Worth Should Be in Stocks?
Why Allocation Matters
Stocks grow faster over long periods but drop sharply in recessions. Bonds are more stable but grow slowly. Your allocation should reflect:
- Time horizon: When do you need the money?
- Risk tolerance: Can you watch your portfolio drop 30% without panic-selling?
- Income stability: Do you have a reliable income that doesn't depend on your portfolio?
Common Rules of Thumb
The "110 minus age" rule
Stock allocation = 110 - your age
- Age 25 → 85% stocks, 15% bonds
- Age 35 → 75% stocks, 25% bonds
- Age 45 → 65% stocks, 35% bonds
- Age 55 → 55% stocks, 45% bonds
- Age 65 → 45% stocks, 55% bonds
This rule produces a moderately conservative allocation. Some use "120 minus age" for slightly more growth, especially given longer life expectancies.
Target date funds
The simplest approach: buy a target date fund (like Vanguard Target Retirement 2055) and do nothing. The fund automatically shifts from stocks to bonds as your target retirement year approaches.
You give up some control and pay slightly higher fees (~0.10-0.15% expense ratio), but you get a built-in allocation strategy that rebalances automatically.
Should Your Home Count as Part of Net Worth?
For allocation purposes, most people exclude primary residence value from their investable net worth. Your home doesn't produce investment returns in the traditional sense — you can't easily draw from it without selling or taking a loan.
The relevant question is: of your investable assets (retirement accounts, taxable brokerage, bonds, cash beyond emergency fund), what percentage is in stocks?
Age-Based Allocation Targets
| Age | Stocks | Bonds/Cash | Notes |
|---|---|---|---|
| 20s | 85-100% | 0-15% | Maximum growth phase |
| 30s | 80-90% | 10-20% | Still primarily growth |
| 40s | 70-80% | 20-30% | Begin gradual shift |
| 50s | 55-70% | 30-45% | Protect what you've built |
| 60s | 40-60% | 40-60% | Sequence of returns risk |
| 70s+ | 30-50% | 50-70% | Preservation focus |
These are starting points. A 55-year-old with a government pension and no dependents can afford more risk than the table suggests. A 35-year-old with volatile self-employment income may want more bonds.
The 3-Fund Portfolio
A simple, effective approach for any allocation:
- U.S. Total Stock Market (e.g., VTSAX or VTI) — domestic stocks
- International Stock Market (e.g., VXUS) — developed and emerging markets
- U.S. Bond Market (e.g., BND) — bonds for stability
Example at age 35 (80/20 allocation):
- 60% U.S. stocks
- 20% international stocks
- 20% bonds
Rebalance annually (or when allocation drifts more than 5%) by selling the over-performers and buying the under-performers.
Rebalancing
Over time, stocks grow faster than bonds, so your allocation drifts toward stocks. Rebalancing means selling some stocks and buying more bonds to get back to your target.
- Rebalance in tax-advantaged accounts first (no capital gains consequences)
- Rebalance annually, or when any asset class drifts more than 5% from target
- Use new contributions to rebalance: direct them to whichever asset class is below target
FAQ
Should I hold international stocks?
Most experts recommend some international exposure (20-40% of your stock allocation) for diversification. The U.S. doesn't always outperform international markets — history shows they take turns.
Are bonds necessary for younger investors?
Not strictly. At 25 with a 40-year time horizon, you can afford to ride out volatility. Some argue 100% stocks is appropriate until age 35-40. The risk: if you need to sell during a crash (job loss, emergency), all-stock portfolios can be down 40-50%.
What about real estate or other investments?
Real estate, REITs, commodities, and alternatives can have a place in a portfolio, but the core of most people's investments should be diversified stock and bond index funds.
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