Asset Allocation
How you split your money between stocks, bonds and cash, why that split decides how far your portfolio can rise and fall, and how to choose one you can stick with.
Key idea
Asset allocation is how you split your money between asset classes such as stocks, bonds and cash. The split decides how much your portfolio can grow and how far it can fall. More in stocks means more growth over the years and deeper falls along the way.
What it is
Asset allocation is how you split your money between asset classes, mainly stocks, bonds and cash. Stocks can grow the most and fall the furthest, bonds sit in between, and cash barely moves but barely grows. The split you choose decides how much your portfolio can grow over the years and how far it can fall along the way.
Three mixes, one bad year
Here are three ways to split CHF 10,000, and what each does in a year when stocks fall 30% while bonds and cash stay where they are:
Conservative
- Stocks: 25%
- Bonds: 65%
- Cash: 10%
Stocks −30%: the mix falls 7.5%, to CHF 9,250.
Balanced
- Stocks: 50%
- Bonds: 40%
- Cash: 10%
Stocks −30%: the mix falls 15.0%, to CHF 8,500.
Growth
- Stocks: 80%
- Bonds: 15%
- Cash: 5%
Stocks −30%: the mix falls 24.0%, to CHF 7,600.
The conservative mix, 25% stocks, 65% bonds and 10% cash, loses 7.5% and ends at CHF 9,250. The balanced mix, 50% stocks, 40% bonds and 10% cash, loses 15.0% and ends at CHF 8,500. The growth mix, 80% stocks, 15% bonds and 5% cash, loses 24.0% and ends at CHF 7,600. It works the other way too: in a year when stocks gain 20%, the three mixes gain 5.0%, 10.0% and 16.0%. More in stocks means more growth over the years, and deeper falls along the way.
The honest caveat
There's no formula for the right mix. It depends on when you'll need the money, because a fall just before you need it can't be waited out, and on how you'd react to a drop: a mix you sell in a panic does more damage than a more cautious one you stick with. The example also keeps bonds steady, and they don't always cushion a stock fall; sometimes both fall together.
Once you've chosen a mix, markets will pull it away from your target, because the parts grow at different speeds. Rebalancing brings it back.
Swiss note
Your pension fund already invests part of your retirement money for you. As a rule it may hold at most 50% of its assets in shares, and more only if it shows in its annual accounts that its investments stay safe and well spread. When you choose your own mix, remember that this money is invested too.
Key takeaways
- —Asset allocation is the split of your money between stocks, bonds and cash.
- —The share in stocks drives the swings: if stocks fall 30% and bonds hold, 25% in stocks costs 7.5%, 80% costs 24%.
- —The right mix depends on when you need the money and how well you handle drops, not on a formula.
- —Count your pension fund too: it already invests part of your retirement money for you.
Related concepts
Asset Class
Stocks, bonds, cash and real estate each work in their own way.
Diversification
Spread your money so that no single failure can sink you.
Portfolio Rebalancing
Why portfolios drift from their target — and how rebalancing fixes it.
Volatility
Why the road to higher returns is bumpy, and when the bumps matter.
Time Horizon
When you'll need the money decides how much risk it can take.