Two questions
Can you afford a loss? That depends on your income stability, savings, debts and when you need the money. Can you stand it? That is emotional. Someone with a secure job and a 30-year horizon may still sell in a panic. Both answers matter. See risk tolerance.
Time horizon
Your time horizon is how long until you need the money. Stocks have had many bad years, but over long periods have historically recovered. Over a one- or two-year window the range of outcomes is wide. That is why people saving for a near-term goal like a house down payment often choose steadier assets such as Treasury bills or high-yield savings, and long-term savers hold more stocks.
A quick self-check
- How did I feel the last time my investments dropped 20%?
- Would I sell, hold or buy more?
- How many months of expenses are in my emergency fund?
- When do I need this money, and for what?
Turning it into a plan
Many people translate their answers into a mix of stocks, bonds and cash. That is asset allocation. A common rule of thumb is to hold more bonds as the goal date approaches, which is what target-date funds do automatically. Rules of thumb are starting points, not advice for you.
Revisit it
Tolerance changes with life events, jobs and age. Review it yearly and after big changes. A plan you can stick with beats a theoretically perfect plan you abandon.
Quick answers
Is there a right stock/bond split for my age?
There are rules of thumb, but nobody can say the right split for you. A fee-only financial planner can help.
