Allocating your assets according to your age is a strategic way to plan your investments portfolios, since your age is directly related to your investment time horizon and risk capacity.
Why Does Asset Allocation Change Based on Age?
Asset allocation is how you divide your investments among different asset types—stocks, bonds, cash, real estate, and more—to balance potential returns with your tolerance for risk.
While several factors influence asset allocation, age is one of the most important. As you move through different life stages, your financial goals, priorities, risk tolerance, and time horizon change too.
Here’s a simple rule of thumb: invest more in stocks when you’re young, and shift toward bonds as you age.
The relationship between age, risk, and investing time
Younger investors typically focus on growth by holding mostly stocks. They can usually afford to take on more risk because they have a longer time horizon to recover from market downturns. They also have greater earning potential and flexibility, making it easier to bounce back from financial setbacks.
As you move closer to retirement, that flexibility decreases. With less time to recover from losses, it becomes more important to shift toward lower-risk investments that protect your savings and provide stability.
Middle-aged investors often take a more balanced approach. Those nearing retirement prioritize stability, leaning more heavily on bonds and keeping some cash for flexibility.
To get a better grasp of how to structure your portfolio at different life stages, you might find these resources helpful:
Why Your Age Matters for Investing
If you’ve never thought about adjusting your asset allocation based on your age, here’s why it’s a vital move.
It directly affects your time horizon
Your time horizon is essentially how long you plan to keep your money invested before you need to use it. The longer your time horizon, the more risk you can generally afford to take.
For example, someone in their 20s has 40 years or more to let their investment grow and maximize their potential return. That means they have plenty of time to ride out potential market dips and take advantage of long-term gains. On the other hand, someone in their 60s may need to access their funds within five to ten years, which calls for a significantly more conservative approach.
Your risk tolerance changes throughout your life
When you’re younger, you can usually afford to take on more risk. You’ve got time on your side, a longer earning runway, and more chances to recover from any financial setbacks. This is also when compound growth can really work in your favor.
As you hit your 40s or 50s, your priorities often shift. Maybe you have a family to support, a mortgage to pay, or you’re thinking more seriously about retirement. At this point, it’s common to aim for a balance between growth and stability.
By the time you’re nearing retirement, the focus tends to shift again. With fewer working years left and a shorter time to rebound from losses, preserving capital and generating steady income becomes more important than chasing high returns.
In this episode of my podcast, Money for Couples, Paul (27) and Vicki (28) shared how they lost $80K in just one week due to a sudden market downturn. As painful as the loss was, being in their twenties gives them a significant advantage, with a longer time horizon to recover. With consistent saving habits and long-term investing, they can regain control and rebuild their finances over time.
Asset Allocation in Your 20s and 30s
In your 20s and 30s, your asset allocation should be geared towards growing wealth and creating a strong foundation for long-term financial success.
Growth-focused portfolio strategy
At this stage of life, focus on building solid investment habits by consistently setting aside a portion of each paycheck, even if it feels small at first.
With consistency, even small contributions can grow significantly over time; so the sooner you begin investing, the more you’ll benefit in the long run.
Recommended allocation: 80–90% stocks, 10–20% bonds
With retirement still decades away, you can afford to allocate 80–90% of your portfolio to stocks that maximize long-term growth. The remaining 10–20% in bonds adds a small cushion to help smooth out market volatility and offer some peace of mind during downturns.
Want to explore your options for stocks and bonds? Feel free to check out these helpful guides:
Types of investments to prioritize
When starting out, low-cost index funds are a great core investment choice. They offer instant diversification across hundreds or even thousands of companies, while keeping fees low. If you prefer a more hands-off approach, target date funds can be a smart option. These funds automatically adjust your asset allocation over time, making them an easy all-in-one solution.
To get the most out of your investments, prioritize tax-advantaged accounts like 401(k)s and Roth IRAs before turning to regular, taxable accounts, as this will reduce the impact of taxes over time.
Common mistakes to avoid when starting out
In your 20s and 30s, you’re just starting to dip your toes into the world of investing. Here are some common mistakes to watch out for:
Waiting until you have “enough” to invest
Many people delay investing because they believe they need to accumulate more capital first. In reality, waiting often means missing out on years of potential growth. Don’t underestimate a small initial investment, as it can grow significantly over time through the power of compound growth.
Playing it too safe too early
Being overly cautious with your investments in your 20s and 30s can hold you back from reaching your full financial potential. I’m not saying you should gamble it all on risky bets, but keeping too much in low-growth assets may make it harder to outpace inflation and build long-term wealth.
This stage of life is your best window to take calculated risks that can pay off in the long run. You have the luxury of time on your side, plus flexibility from your growing earning potential.
Letting emotions drive your decisions
Young investors often get caught up in the excitement of the market, constantly checking their investments and reacting to short-term fluctuations. This can lead to emotional decisions that hurt long-term performance.
Instead, trust your strategy. Long-term investing requires patience and consistency, allowing your investments to stabilize and grow over time.
Asset Allocation in Your 40s and 50s
In your 40s and 50s, it’s time to shift your asset allocation toward a more balanced strategy—one that still allows for growth while prioritizing the protection of your hard-earned savings.
The transition to a more balanced portfolio
Your 40s and 50s are often your peak earning years. In addition to prioritizing growth during this stage, it’s essential to build a stable savings foundation that will help you enjoy a worry-free retirement.
It’s never too late to start investing, so if you’re already in your 40s and haven’t started yet, don’t despair. In this video, I share a clear, actionable investment plan you can use if you’re starting at 40:
Recommended allocation: 60–70% stocks, 30–40% bonds
As you enter your 40s and 50s, you don’t need to ditch stocks entirely; instead, aim for steady growth while adding more protection to help you feel more confident about your financial future.
I recommend allocating 60–70% to stocks for continued growth, while shifting 30–40% to bonds for added stability as retirement draws closer.
As you approach retirement, focus on investing in quality companies with strong dividends, as opposed to the more speculative growth stocks that may have been appealing in your younger years. You may also want to consider inflation-protected securities like TIPS (Treasury Inflation-Protected Securities) to safeguard your purchasing power.
Protecting your savings
As your portfolio grows, the dollar amount at risk during market downturns increases, so protecting your wealth becomes even more important, even if your allocation still leans toward growth.
It’s a good time to review your insurance coverage to protect your growing assets from potential setbacks, such as disability, major health issues, or liability claims. Ensuring you’re well covered can provide peace of mind as you continue building your nest egg.
Rebalancing strategies as retirement approaches
As you plan for your retirement, it’s important to establish a regular schedule for rebalancing your portfolio to make sure it still aligns with your goals—I recommend doing this at least annually, especially since different investments grow at different rates.
Consider using new contributions to rebalance your portfolio, directing them to asset classes that have fallen below your target percentages. You may want to rebalance more conservatively each year, gradually increasing your bond allocation and reducing your stock exposure in a strategic manner.
Asset Allocation in Your 60s and Beyond
As you enter your 60s and beyond, your focus typically shifts from growing your nest egg to protecting it and generating reliable income to support your lifestyle in retirement.
Preservation and income generation
At this stage of life, it’s essential to manage your assets in a way that balances stability with longevity. Consider creating a “bucket strategy,” where your money is divided into different “buckets,” or time-based needs:
- Short-term (one to two years): Keep this portion in cash or cash equivalents to cover immediate living expenses.
- Mid-term (three to seven years): Allocate assets to bonds or conservative investments that provide consistent income and preserve capital.
- Long-term (eight or more years): Keep a smaller portion in stocks to allow for continued growth, which helps your savings keep up with inflation.
Some retirees feel tempted to move out of stocks completely, but doing so can expose you to the risk of outliving your savings. Maintaining even a modest allocation to stocks gives your portfolio a chance to grow and support your needs over a retirement that could last up to three decades or more.
Recommended allocation: 30–40% stocks, 50–60% bonds, some cash
Around retirement age, your priorities shift towards preserving your wealth while still allowing room for steady growth to support a long, comfortable retirement.
I recommend allocating 30–40% to stocks for continued growth and 50–60% in bonds for stability and income, along with some cash to provide flexibility for everyday expenses.
Your bond investments should be diversified across different types and maturities to help manage interest rate risk while ensuring a reliable income stream. The cash portion should ideally cover one or two years of spending beyond what’s supported by your Social Security payments, pensions, or other guaranteed income sources; this acts as a buffer during market downturns so that you can avoid selling your investments.
Withdrawal strategies in retirement
One common approach to withdrawing retirement income is the 4% rule, which recommends withdrawing 4% of your portfolio in your first year of retirement, then adjusting that amount for inflation each year.
To make your money last and to reduce taxes, be strategic about which accounts you draw from first. Ideally, you’d start with taxable accounts, then move on to tax-deferred accounts like traditional IRAs, and leave tax-free accounts such as Roth IRAs for last.
Keep in mind that Required Minimum Distributions (RMDs) from traditional retirement accounts begin at age 73, meaning you’ll need to start withdrawing a minimum amount each year based on your life expectancy.
Adjusting for longevity risk
With more people living well into their 90s, your retirement savings may need to last 30 years or more. That’s why it’s important to strike a balance between drawing income and keeping your portfolio growing, so you won’t find yourself stretched thin in your later years.
Consider whether an annuity might make sense for part of your portfolio, as it provides guaranteed income for life.
Remember to regularly review your withdrawal rate and asset allocation to ensure you’re staying on track. If you find yourself withdrawing too quickly, be prepared to make small adjustments to preserve your savings for the long haul.
Planning for retirement might feel like something to worry about later, but starting early can make all the difference. These articles offer practical tips to guide you through this process:
Beyond Age: Other Factors That Impact Your Asset Allocation
Here are some other key considerations that can influence how you invest.
Personal risk tolerance
Everyone has a different tolerance for market fluctuations, and it’s important to know yours. Some people may struggle with significant market drops and react by selling at the worst possible time; for others, this isn’t a problem.
Before deciding on your asset allocation, take an honest risk tolerance quiz to gauge how you’d respond to volatility. Even if your age suggests a higher stock allocation, a more conservative approach may be better if market swings make you anxious.
The goal is to invest in a way that feels comfortable so that you can avoid impulsive decisions that could harm your financial future.
Financial goals and timeline
In addition to age, major life events or financial goals such as buying a home, funding education, or starting a business can require adjustments to your asset allocation based on when you’ll need the funds.
Typically, near-term goals (ones that you plan to reach within five years) require a more conservative investment portfolio, while long-term retirement savings can be more growth-oriented.
Regardless of your financial goals, having specific, measurable goals is key. They’ll help you define the returns you need, guiding your decision on how much risk to take with your investments.
Income stability and career stage
Your job security also plays a significant role in determining the amount of risk you can comfortably take with your investments.
For example, someone with a stable government job may be able to take on more investment risk compared to someone with a variable income. High-income professionals may also need less investment risk, as their career earnings can help offset lower investment returns.
Conversely, business owners often have a significant portion of their wealth tied up in their business, which calls for a more conservative approach to their investment portfolio in order to balance overall risk.
Family situation and responsibilities
If you’re supporting children through college or helping aging parents, it’s important to consider your investment timeline and adjust your risk tolerance accordingly to align with your responsibilities.
Having dependents often increases the need for financial stability, which may lead to a more conservative asset allocation than your age alone would suggest. Meanwhile, single individuals may have more flexibility in taking on investment risk compared to those with financial dependents.
How to Build a Diversified Portfolio at Any Age
No matter your age, it’s essential to avoid putting all your eggs in one basket when it comes to investing. Here’s how you can create a diversified portfolio that strikes a balance between growth and stability at any stage of life.
Look into different investment vehicles
Building a diversified portfolio is key to balancing risk and reward. To achieve this, consider how these different investment vehicles can help you reach your goals:
- Individual Retirement Accounts (IRAs) and 401(k)s offer tax advantages that can significantly boost your long-term returns compared to taxable accounts.
- Robo-advisors provide automated investment management with proper diversification and regular rebalancing, usually at a lower cost than traditional financial advisors.
- Mutual Funds and ETFs offer instant diversification across many investments with a single purchase, making them ideal building blocks for most investors.
Consider index funds and ETFs
Index funds and ETFs are excellent options for diversifying your portfolio because they come with low costs and broad exposure. They can provide a solid foundation for a diversified, cost-efficient portfolio
- Index funds track broad market indexes like the S&P 500, offering exposure to hundreds of companies at very low fees. They tend to outperform actively managed funds over time.
- Total Market ETFs provide exposure to thousands of U.S. stocks across large, medium, and small companies, making them an easy-to-buy and easy-to-sell option for comprehensive market coverage.
- Bond index funds offer diversified exposure to government and corporate bonds with lower costs than actively managed bond funds, helping to strengthen the fixed-income portion of your portfolio.
International vs. domestic investments
Including international stocks in your portfolio can enhance diversification, as foreign markets don’t always move in tandem with U.S. markets. A good rule of thumb is to allocate 20–40% of your stock investments to international markets, giving you the opportunity to tap into growth in emerging economies.
A well-rounded allocation should include both developed markets (like Europe and Japan) and emerging markets (such as Brazil and India). However, be mindful that emerging markets can carry higher risk and volatility, so it’s important to consider your risk tolerance before making any decisions.
Common Asset Allocation Mistakes
Steer clear of these common mistakes in order to protect your financial growth.
Being too conservative when young
Some young investors hesitate to invest in stocks, favoring cash or low-risk bonds instead. While this might feel safer, it limits your ability to grow your wealth over time. Early in your investing journey, time is your greatest asset—leaning too conservative too soon can mean missing out on valuable compound growth, which is much harder to catch up on later.
Not adjusting your allocation as you age
On the flip side, being overly conservative when young, sticking with the same aggressive allocation that worked in your 30s can leave you too vulnerable to market swings as you approach retirement. With less time to recover from potential losses, this could derail your financial plans.
Consider options like target date funds, which gradually shift your allocation to become more conservative over time.
Panic selling during market downturns
When facing market dips, it can be tempting to pull your money out due to fear, but remember: panic selling often locks in losses and disrupts your long-term growth.
Market corrections and bear markets are normal parts of investing and are almost always followed by recoveries and new market highs. Having a written plan in place can help you stay calm and disciplined during volatility. It also helps to avoid checking your portfolio too often during volatile periods.
Instead of hitting the panic button anytime there’s a downturn, you can make small, consistent tweaking when needed.
If you’re unsure what to do during a downturn, here are a couple of my guides with clear, actionable tips:
Chasing performance instead of sticking to a plan
It’s easy to get caught up in the excitement of the latest trending investment, especially when headlines make it sound like a once-in-a-lifetime opportunity. But jumping from one hot pick to another often leads to buying high and selling low, which hurts your long-term returns.
Instead, focus on a steady, diversified strategy that aligns with your time horizon and risk tolerance. It might not be as exciting, but a consistent approach often leads to better long-term results.
How to Implement and Maintain Your Asset Allocation
Take control of your investment strategy with these simple but effective steps.
Set up automatic investments
One of the easiest ways to stay on track with your asset allocation is by setting up automatic contributions to your investment accounts. With automatic investing, a fixed amount of money is transferred from your bank account to your investment account on a regular basis, making the process simple and hassle free.
This “set it and forget it” approach helps you avoid the temptation of skipping a contribution and ensures you’re consistently investing.
Even if they’re small, automatic investments will grow over time, building substantial wealth through consistency and compounded growth. Additionally, automatic investing lets you practice dollar-cost averaging. This means you buy more shares when prices are low and fewer when prices are high, potentially lowering your average cost over time. Regular portfolio review and rebalancing
It’s a good idea to check your portfolio at least once a year to ensure your investments still match your target allocation. If any asset class has drifted more than 5–10% from your desired balance, consider rebalancing to maintain your preferred risk level.
Occasions like milestone birthdays (turning 30, 40, 50, 60, etc.) can serve as helpful reminders to reassess whether your asset allocation still suits your life stage and financial objectives.
When Your Portfolio Doesn’t Match Your Goals
There might come a time when your investments no longer generate enough growth to reach your long-term financial targets, leaving you with a shortfall for major life goals like retiring, funding an education, or buying a home.
In these cases, it’s time to reassess your investment strategy. You may be taking on more risk than your situation warrants, which could expose you to greater losses during market downturns, making it challenging to recover from, both emotionally and financially.
This misalignment can create unnecessary stress about your financial future, even if you’re saving regularly. You might find yourself working longer than expected, adjusting your lifestyle, or increasing savings efforts to compensate for missed growth.
Take a look at this real-life example from my podcast: Shannon and Wilson had a strong financial foundation but disagreed on their next move—Wilson wanted to invest using their home equity, while Shannon was hesitant about taking on more debt.
| [00:56:30] Ramit: Part of moving from scarcity to safety and abundance is actually zooming out of playing small and taking full stock. You invest over $20,000 per year. That’s a lot of money. [00:57:04] These are big numbers. We are talking about, over the course of your lifetime, millions. We have to be focusing on these things. This is great. $23,000 a year, ballpark. I understand that your portfolio of investments is two thirds in real estate and one third in equity stocks and a little bit of crypto. And I believe, Wilson, you feel like that should be swapped. Instead of two thirds in real estate, it should be one third in real estate. Is that correct? [00:57:40] Wilson: Yeah. Or maybe 50-50. However, what I’ve realized in doing the conscious spending plan is that my business is high risk. That’s actually something I’m not really accounting for in this. So I actually have come to the realization that maybe we are exactly where we need to be right now. [00:57:58] Ramit: Okay, because you have high risk on one end of the barbell, and then you have this real estate property on the other end. [00:58:13] Ramit: Wilson, you suggested pulling equity out of the house that you own because you have a lot of equity in it, 80% equity, and you want to take the equity out and do what? [00:58:28] Wilson: I’d like to create our cushion or safety, $50,000-dollar safety. [00:58:33] Ramit: Do you still feel you should take equity out of the house? [00:58:37] Wilson: Definitely for the $50,000 cushion that we want. I think we should, yes. [00:58:54] Ramit: What do you think about that, Shannon? [00:58:55] Shannon: It still makes me feel a little bit uncomfortable, and Wilson is supposed to get some significant commission checks in the next year, and I would almost rather just take those commission checks, put that into the emergency fund, rather than having to take out more equity on the house. [00:59:15] Ramit: Okay. Have you two argued, debated, discussed this topic before? [00:59:21] Shannon: Oh, yes. We just come to, I guess, a stopping point. [00:59:26] Ramit: Stalemate. |
Misaligned goals can create friction, but they’re also a cue to pause and realign. If your portfolio doesn’t quite feel right, it might be time to talk things through and adjust your asset allocation to better reflect your shared goals.
Taking Action with Your Asset Allocation Today
Gaining clarity on your asset allocation—especially one that reflects your age and stage of life—will give your investments purpose and direction.
Start by outlining your financial goals and timelines, then check if your current investments align with them. If not, make gradual adjustments to set them back into balance.
If you prefer a simpler approach, a target date fund or robo-advisor can help manage your allocation too. The most important thing is to just start and stay consistent.
Still unsure what’s the best asset allocation for you? You can check out some of my other guides about investing, stocks, and bonds:
