One of the most important decisions you will make as an investor is how to divide your money between different types of investments. This is called asset allocation. The most common approach is age-based allocation, where your investment mix changes as you get older. In this guide, we will explain how it works and why it matters.
What is Age-Based Asset Allocation?
Age-based asset allocation is a strategy where you adjust the mix of stocks, bonds, and other investments in your portfolio based on your age. The basic idea is simple: when you are young, you can take more risk because you have time to recover from market downturns. As you get older and approach retirement, you should reduce risk to protect the money you have saved.
The classic rule: Subtract your age from 100 (or 110 for a more aggressive approach) to determine the percentage of your portfolio that should be in stocks. For example, a 30-year-old would have 70-80% in stocks and 20-30% in bonds.
Why Your Age Matters for Investing
Your age affects your investment strategy for several important reasons:
- Time horizon: Younger investors have decades before retirement, giving them time to ride out market volatility
- Recovery time: A 25-year-old losing 30% in a market crash has 40 years to recover. A 60-year-old does not have that luxury
- Income needs: Retirees often need to draw money from their investments, so stability becomes more important
- Risk tolerance: Generally, the ability to handle risk decreases as you get older and closer to needing your money
Asset Allocation by Age Group
In Your 20s: Aggressive Growth
Your 20s are the best time to take investment risk. You have decades of earning power ahead and plenty of time for your investments to grow.
Suggested Allocation (Age 20-29)
- 80-90% Stocks (with emphasis on growth stocks)
- 10-20% Bonds or cash
- Consider: International stocks, small-cap stocks, index funds
At this age, market downturns are buying opportunities. Stay invested and focus on contributing consistently.
In Your 30s: Growth with Some Stability
In your 30s, you may have more financial responsibilities like a mortgage or children. You still have a long time horizon, but you can start adding some stability.
Suggested Allocation (Age 30-39)
- 70-80% Stocks
- 20-30% Bonds
- Consider: Diversifying across sectors, adding international exposure
Continue maximizing retirement contributions and maintain an emergency fund separate from investments.
In Your 40s: Balanced Approach
Your 40s are a transition period. Retirement is no longer a distant concept. It is time to think more seriously about protecting your gains while still growing your wealth.
Suggested Allocation (Age 40-49)
- 60-70% Stocks
- 30-40% Bonds
- Consider: Blue-chip stocks, dividend stocks, investment-grade bonds
This is a good time to catch up on retirement savings if you are behind and review your overall financial plan.
In Your 50s: Preservation Focus
With retirement approaching in 10-15 years, protecting your portfolio becomes increasingly important. You want growth, but not at the cost of major losses.
Suggested Allocation (Age 50-59)
- 50-60% Stocks
- 40-50% Bonds
- Consider: High-quality dividend stocks, government bonds, TIPS
Start planning your retirement income strategy and consider how you will draw down your investments.
Age 60 and Beyond: Income and Safety
In retirement or near-retirement, your priorities shift to generating income and preserving capital. You still need some growth to outpace inflation, but stability is key.
Suggested Allocation (Age 60+)
- 30-50% Stocks
- 50-70% Bonds and cash
- Consider: Dividend aristocrats, Treasury bonds, municipal bonds, CDs
Focus on creating reliable income streams and maintaining enough growth to keep up with inflation.
The Glide Path Concept
Many target-date retirement funds use what is called a "glide path." This is the gradual shift from aggressive to conservative investments over time. The fund automatically rebalances based on your target retirement year.
- Early years: Heavy stock allocation for growth
- Middle years: Gradual shift toward bonds
- Near retirement: Increased focus on income and stability
- In retirement: Most conservative allocation, but still some growth
Factors Beyond Age to Consider
While age is important, it should not be the only factor in your allocation decision:
- Personal risk tolerance: Some people are naturally more comfortable with volatility
- Other income sources: A pension or rental income might let you take more investment risk
- Health considerations: Healthcare costs can affect how much risk you can take
- Retirement goals: Early retirement requires a different strategy than working until 65
- Debt levels: High debt may require a more conservative approach at any age
How to Rebalance Your Portfolio
As markets move, your allocation will drift from your target. Regular rebalancing keeps you on track:
- Check quarterly or annually: Review your portfolio allocation regularly
- Set thresholds: Rebalance when an asset class drifts 5% or more from target
- Use new contributions: Direct new money to underweighted asset classes
- Consider tax implications: Use tax-advantaged accounts for rebalancing when possible
Track Your Portfolio Allocation
Pro Trader Dashboard helps you visualize your current asset allocation and track your portfolio performance over time. See how your investments are distributed and make informed rebalancing decisions.
Summary
Age-based asset allocation is a time-tested strategy for managing investment risk throughout your life. Start aggressive when young, gradually become more conservative, and always consider your personal situation. The key is to have a plan and stick to it through market ups and downs.
Ready to learn more about building your portfolio? Check out our guide on index fund investing or learn about blue-chip stocks.