Deciding on Your Asset Allocation
Before you decide which stocks or ETFs to buy, you need to decide how much of your portfolio goes where.
That’s asset allocation — the single biggest driver of your long-term returns.
It defines the mix between different types of investments such as stocks, bonds, and cash. Get it right, and you’ll balance growth with stability. Get it wrong, and even great stock picks won’t save your portfolio.
Your investor risk profile — how much risk you can take versus how much risk you can handle — sits at the core of this decision. It reflects your time horizon, financial goals, and emotional tolerance for market swings.
A growing dividend income is great — but if your overall mix doesn’t align with your risk profile, it can slow or even derail your path to financial independence.
What Is Asset Allocation? (The Mix That Drives Results)
Asset allocation is your chosen percentage split across major asset classes (e.g., 70% stocks / 25% bonds / 5% cash).
It’s your portfolio’s risk and return dial:
Purpose: Match risk to your time horizon and goals, and keep behaviour disciplined.
How it works: You set target weights (the policy mix), invest to those targets, and rebalance back when markets move. It impacts your rate of return (i.e. your portfolio velocity).
Why it matters: Most long-term performance differences come from this high-level mix, not from picking the “perfect” stock.
Asset Classes (What You Can Own)
Each asset class plays a unique role. Your allocation decides how much of each you own.
Asset Class | Description | Role in Portfolio |
|---|---|---|
Equities (Stocks) | Ownership in companies, including ETFs and mutual funds. | Long-term growth and inflation protection. |
Fixed Income (Bonds, GICs) | Loans to governments or corporations. | Stability and income generation. |
Cash or Cash Equivalents | Savings accounts, money market funds. | Liquidity and short-term safety. |
Alternative Assets (Optional) | Real estate, commodities, or private equity. | Diversification beyond traditional assets. |
Typical Asset Allocation Models
Your mix depends on your risk tolerance, time horizon, and financial goals. While there’s no perfect formula, these models serve as a starting point.
Investor Type | Stocks | Bonds | Cash | Description |
|---|---|---|---|---|
Conservative | 30% | 60% | 10% | Focus on capital preservation and steady income. Ideal for investors near or in retirement. |
Balanced | 60% | 35% | 5% | Combines growth and stability; suitable for late-career investors. |
Growth | 80% | 15% | 5% | Emphasizes long-term appreciation; tolerates short-term volatility. |
Aggressive Growth | 100% | 0% | 0% | For investors with long time horizons and high risk tolerance. |
💡 Did You Know?
Asset allocation accounts for the lion’s share of long-term return differences; timing and selection matter far less over the course of decades.
Age-Based Allocation Framework
The “age rule” has evolved. Many investors now use 110 – Age or 120 – Age for equity exposure to reflect longer lifespans and lower bond yields.
Ultimately, the choice is yours.
Age Range | Investor Stage | Risk Level | Example Allocation (Stocks / Bonds / Cash) | Notes |
|---|---|---|---|---|
20 – 29 | 🌱 Apprentice Investor | Aggressive Growth | 100 / 0 / 0 | Focus on maximum growth. Time horizon allows for volatility. |
30 – 39 | 🪴 Achiever Investor | Growth | 90 / 5 / 5 | Building wealth phase. Regular contributions smooth out volatility. |
40 – 49 | 🌳 Strategist Investor | Balanced Growth | 80 / 15 / 5 | Shift toward balance as financial goals near. |
50 – 59 | 🌳 Pre-Retirement | Moderate / Balanced | 70 / 25 / 5 | Focus on protecting gains and maintaining growth. |
60 – 69 | 🌴 Early Retirement | Conservative | 60 / 30 / 10 | Prioritize income and capital preservation. |
70 + | 🌴 Retired Investor | Capital Preservation | 40 / 50 / 10 | Emphasis on stability and withdrawal sustainability. |
⚠️ Caution: These are guidelines, not rules. Pensions, rental income, and withdrawal needs can justify different mixes.
Conservative and capital preservation are tricky. What I observed is that large portfolios will stay in equities since there are no risks to outliving the portfolio, whereas smaller portfolios have different risks.
The challenge in the late years is health and risking outliving your portfolio, and that’s where you need to think strategically. Sometimes it’s not about asset allocation but about tax optimizations or considering annuities.
The Hidden Volatility in Fixed Income
Many investors assume fixed income means guaranteed income. That’s only true for individual bonds held to maturity— not for bond ETFs.
Bond ETFs are made up of many bonds (see how bonds actually work), but their market value changes daily as interest rates move or during market stress.
That’s why during the COVID-19 crash (March 2020), several Canadian bond ETFs — including aggregate and corporate bond ETFs — dropped 6–15% in a single month, even though they were labeled “safe.”
Individual Bonds vs Bond ETFs in a Market Shock
Feature | Individual Bonds | Bond ETFs |
|---|---|---|
Income Type | Fixed coupon (guaranteed if held to maturity) | Distribution varies as bonds roll over |
Principal Risk | Returned at maturity | Market value fluctuates |
Behaviour in Rate Shock | No impact if held to maturity | Price drops when rates rise |
Behaviour in Market Crash | Usually stable (if government-backed) | Can fall sharply (liquidity + credit fears) |
Similarity To | GIC-like predictability | Stock-like volatility |
Takeaway: Bond ETFs belong in a portfolio for income stability over time, not for principal protection during volatility.
How to Determine Your Allocation
Time Horizon: Longer horizon → more equity capacity.
Risk Tolerance: How much drawdown can you stomach and still stay invested?
Financial Goals: Retirement date, income needs, big purchases.
Income Stability: Pensions/salary stability can justify more equity.
Rebalancing Discipline: Markets drift; you reset to target weights.
I recommend you use the age ranges to make your own allocation and review based on your ability to handle fluctuations.
Your allocation choices do impact how fast you can reach your goals so it’s important you understand that you are making intentional choices to meet your goals. Allocations is one factor that says you either work until 65, or you can stop at 55.
I know, it’s a constant tug of war.
Allocation Rebalancing Example
Target allocation: 70% equities / 30% bonds.
If equities rally to 80%, you trim stocks and add to bonds to restore the 70/30 balance.
If equities sell off to 60%, you add to stocks at lower prices.
Why Rebalancing Matters
Rebalancing systematically buys low and sells high without guessing highs or lows.
After rallies, you harvest gains and reduce risk.
After declines, you add to equities at better prices.
You’re using volatility, not fearing it.
Quarterly Works Well
A quarterly cadence is rules-based and unemotional. It lets markets move enough to matter while keeping your risk steady.
Example cycle:
Q1: Trim equities after a run-up → add to bonds/cash.
Q2: Add to equities after a pullback → restore growth engine.
Bottom line: It’s not about prediction — it’s about consistency over drama.
Final Thoughts — Stay Aligned, Not Reactive
Asset allocation is your anchor. It defines your comfort zone and shapes every investment decision you’ll make. You can’t control the market — but you can control your mix, your behaviour, and how often you rebalance.
Stick to your plan, review your mix once or twice a year, and let the plan do its job.
That’s how you turn short-term volatility into long-term stability.
💬 “Asset allocation doesn’t predict the future — it protects you from it.”