What Is the Right Mix of Stocks and Bonds for Me?

Here is an imperfect but workable rule of thumb: If you are investing mainly for retirement, you should “own your age” in bonds. So for example, a 30-year-old would have 30% of her portfolio in bonds, and 70% in stocks. A more risk-taking version of this rule says to hold 110 or 120 minus your age in stocks. In that case, a 30-year-old would have 80% or 90% in stocks, and then gradually switch to bonds over the years.

Such rules are based on the idea that younger investors usually are better able to recover from losses in the stock market, and so can take advantage of the higher returns equities offer. Most “target-date” mutual funds, which offer a premixed portfolio of stocks and bonds that changes as you age, are based on this idea. Some 529 college-saving funds similarly start out heavy in stocks but then quickly shift to safer bonds as the child nears the end of high school.

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But while age- or time-based rules are helpful to get you started, they are no match for a careful financial plan. Regardless of your age, how much risk you can handle depends on whether a market loss would keep you from meeting basic financial needs. It also hinges on what else is going on in your life: If you have a steady job with a reliable income, for example, you probably have greater tolerance for stock-market risk than an entrepreneur of the same age.

And then there’s psychology. “One of the questions you should ask yourself is, ‘Am I emotional or am I disciplined?’” says Sam Stovall of S&P Capital IQ. When markets crash, it’s very tempting to sell just to make the pain stop. But frequent trading in and out of the market is likely to cost you returns—it’s just too hard to correctly time when to buy and when to sell. Take a look at how much money you have in stocks, and imagine losing a half of it. (Stocks fell by about that much in the financial crisis.) If you know you couldn’t stand that big a hit, hold less in equities.