Helpful information for investors to consider when determining a suitable asset allocation.
Investing strategies

Choosing the right asset mix

Helpful information for investors to consider when determining a suitable asset allocation.
9 minute read
August 05, 2020
Investing strategies
Managing portfolios
How to invest
Asset mix

At a glance

  • Your investment goal, time frame for needing the money, and risk tolerance should determine your target asset mix.
  • Each asset class—stocks, bonds, and cash—plays a different role in a balanced portfolio.
  • Once you know your target asset mix, you can choose individual investments to hold in your portfolio.

One of Vanguard’s key investment principles is to create clear, appropriate investment goals. For example, your goal may be to save for retirement. That goal, along with your time frame and risk tolerance, determines your target asset allocation—the ideal mix of stocks, bonds, and cash you should hold in your portfolio.

Your target asset mix is like a bull’s-eye: Zero in on it, stay focused, and tune out the distractions so you can reach your goal.

Here’s some information to help you choose your target asset allocation.

Start with your goal, time frame, and risk tolerance

Before you choose a target asset allocation, ask yourself the following questions to determine these 3 things:

  1. Your goal.
    What am I investing for? Am I saving for retirement or a down payment on a house? It’s possible to have multiple goals, but it may be easier to focus on one at a time.

  2. Your time frame.
    How much time do I have to invest before I’ll need the money? Consider how you plan to make withdrawals. Will you take all the money at once (to put toward a down payment on a house)? Or can you stretch your withdrawal period over several years (like withdrawing from a retirement account throughout retirement)?

    Your time frame affects the amount you’ll need to save to meet your goal. Let’s say you want a $10,000 down payment in 6 years. If you open an account with $100 and earn a 6% average annual return, you’ll need to save around $114 a month for 6 years to reach $10,000. All other factors being equal, if you want the same down payment in only 3 years, you’ll have to save over $250 a month.

    Note: This hypothetical example does not represent the return on any particular investment and the rate is not guaranteed.

  3. Your risk tolerance.
    What’s my comfort level with the unknown? Generally, stocks are riskier than bonds, and bonds are riskier than cash.

    Your target asset allocation should contain a percentage of stocks, bonds, and cash that adds up to 100%. A portfolio with 90% stocks and 10% bonds exposes you to more risk—but potentially gives you the opportunity for more return—than a portfolio with 60% stocks and 40% bonds.

More information 

Make a plan to reach your goal

Understand the asset classes Each asset class responds differently to market movement. Holding investments from each one reduces your overall risk, which means your portfolio will be in a better position to weather market ups and downs. The percentage you invest in each asset class may be the most important factor in determining your portfolio’s short- and long-term risks and returns.

Asset class Designed for Characteristics
Stocks Growth When you buy a stock, you become a partial owner of the company. If the company does well, you’ll generally profit. If it doesn’t, you may lose money.
Bonds Income and stability When you buy a bond, you’re loaning the issuer money they agree to repay when the bond reaches its due date. In exchange for the loan, you receive regular interest payments.
(a.k.a. short-term reserves like money market funds, certificates of deposit, and savings accounts)
Safety Use cash to save for short-term or emergency use. There’s minimal risk your investment will fluctuate in value in response to market conditions. Your money won’t significantly increase in value, but you can expect to receive some income in the form of interest.

Over the long term, you can see how different asset classes (in globally diversified portfolios) have responded to market movement:

100% bonds

Historical risk/return (1926–2018)
Average annual return 5.3%
Best year (1982) 32.6%
Worst year (1969) –8.1%
Years with a loss 14 of 93

50% stocks/50% bonds

Historical risk/return (1926–2018)
Average annual return 8.2%
Best year (1933) 32.3%
Worst year (1931) –22.5%
Years with a loss 18 of 93

100% stocks

Historical risk/return (1926–2018)
Average annual return 10.1%
Best year (1933) 54.2%
Worst year (1931) –43.1%
Years with a loss 26 of 93

When determining which index to use and for what period, we selected the index we deemed to be a fair representation of the characteristics of the referenced market, given the information currently available.

For U.S. stock market returns, we use the Standard & Poor’s 90 Index from 1926 through March 3, 1957; the S&P 500 Index from March 4, 1957, through 1974; the Dow Jones U.S. Total Stock Market Index (formerly known as the Dow Jones Wilshire 5000 Index) from 1975 through April 22, 2005; the MSCI US Broad Market Index from April 23, 2005, through June 2, 2013; and the CRSP US Total Market Index thereafter.

For U.S. bond market returns, we use the S&P High Grade Corporate Index from 1926 through 1968; the Citigroup High Grade Index from 1969 through 1972; the Lehman Brothers U.S. Long Credit AA Index from 1973 through 1975; the Bloomberg Barclays U.S. Aggregate Bond Index from 1976 through 2009; and the Bloomberg Barclays U.S. Aggregate Float Adjusted Index thereafter.

For U.S. short-term reserves, we use the Ibbotson U.S. 30-Day Treasury Bill Index from 1926 through 1977 and the Citigroup 3-Month U.S. Treasury Bill Index thereafter.

Find your target Our investor questionnaire, which you can complete in about 5 minutes, can help you find an appropriate target asset allocation. Once you have your questionnaire results, you can open an account and choose among individual stocks, bonds, mutual funds, and ETFs (exchange-traded funds) to build a portfolio that matches your target asset allocation. You can also partner with a financial advisor to create a professionally managed, customized financial plan to help you reach your goals.

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Get to know us, and find out what to expect if you enroll.

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All investing is subject to risk, including the possible loss of the money you invest.

Diversification does not ensure a profit or protect against a loss. Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.

Past performance is no guarantee of future returns. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.

You must buy and sell Vanguard ETF Shares through Vanguard Brokerage Services (we offer them commission-free) or through another broker (which may charge commissions). See the Vanguard Brokerage Services commission and fee schedules for full details. Vanguard ETF Shares are not redeemable directly with the issuing fund other than in very large aggregations worth millions of dollars. ETFs are subject to market volatility. When buying or selling an ETF, you will pay or receive the current market price, which may be more or less than net asset value.

Vanguard's advice services are provided by Vanguard Advisers, Inc. ("VAI"), a registered investment advisor, or by Vanguard National Trust Company ("VNTC"), a federally chartered, limited-purpose trust company.

The services provided to clients will vary based upon the service selected, including management, fees, eligibility, and access to an advisor. Find VAI's Form CRS and each program's advisory brochure here for an overview.

VAI and VNTC are subsidiaries of The Vanguard Group, Inc., and affiliates of Vanguard Marketing Corporation. Neither VAI, VNTC, nor its affiliates guarantee profits or protection from losses.