Building a Better Asset Allocation

January 22, 2026
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Personal finance

Asset Allocation and Diversification

There are (at least) two concepts to understand when it comes to investing.

The first is asset allocation, which refers to saving across different investment categories, such as stocks, bonds, real estate, and small businesses.

The second concept is diversification, which refers to saving across different categories within a single investment vehicle, such as domestic equities, international equities, and emerging markets equities. Both concepts help to reduce the value volatility of one’s portfolio by hedging the risks of individual investments. So if stocks crash? Hopefully, bonds and real estate do well, such that there’s less fluctuation in the value of the whole portfolio. If domestic stocks crash? Hopefully, international equities flourish to help the portfolio tread water.

There’s no perfect asset allocation. In fact, the best asset allocation can only truly be known in retrospect. It needs enough risk to keep pace past inflation, but not so much risk to threaten complete collapse if (or when) the market declines. Remember, the most important part of investing is time in the market. A balanced, diversified portfolio will help your money grow at a steady pace without wiping you out at the next downturn.

Market corrections (drops of 10% or more) occur once a year, and bear markets (drops of 20% or more) occur once every 3 to 4 years.

How to Get a Well-Balanced Portfolio

So, how do we decide on what constitutes a well-balanced portfolio? One rule of thumb is to subtract your age from 110, and the resulting number is how much of your money should be invested in stocks.

So, for a 35 year-man, he would invest 110 - 35 = 75(%) of his money in stocks, and the rest (25%) in bonds.

Another rule of thumb is to consider allocating 20 - 30% of one’s stock portfolio (note: not the whole portfolio) to international equities. So, for that same 35 year-old investor, he might invest 0.20 x 75% = 15% of his total stocks to international ones.

Doing both will build-in some initial allocation (stocks and bonds) and diversification (domestic and international equities).

Portfolios Better Than Our Own

David Swensen, who once ran Yale’s endowment, had suggested allocating investments in the following way:1

  • 30% domestic equities
  • 20% real estate stocks
  • 15% TIPS
  • 15% developed world international equities
  • 15% government bonds
  • 5% emerging markets equities
  • 15% developed world international equities

A diversified portfolio, although perhaps a bit too stock-oriented, in particular for someone nearing retirement.

For someone who wishes to be a bit more bond-involved, The White Coat Investor has also recommended a mix of portfolios with a 60/40 stock to bond ratio, including:

  • 30% US Stocks, 30% International Stocks, 40% US Bonds
  • 30% US Stocks, 25% International Stocks, 5% REITs, 40% US Bonds
  • 30% US Stocks, 25% International Stocks, 5% Real Estate Investment Trusts (REITs), 30% US Bonds, 10% Inflation-Protected Bonds (TIPS)

Again, there is no perfect portfolio. Heck - 1 fund, 2 fund, and 3 fund portfolios even exist. Pick something reasonable, benchmarked to your age and intended retirement, and stick with it. And for those who wish to ignore all of this? Target-date funds are a compelling alternative. But that’s a topic for a different blog post.

1 Portfolio numbers pulled from I Will Teach You to Be Rich.