Anyone else go through the most intense candy/chocolate cravings? And then spend 20 minutes procrastinating and looking at organic chocolate on Amazon?

Budgeting is hard. How do you figure out how much to spend on chocolate when you’re hit with a craving? And how do you decide how much dark, organic “healthy” chocolate to buy vs. Toblerone? Deep life questions.

Like chocolate, there’s lots of different financial assets. How do you decide which assets to hold in a retirement account? How do you decide how much to invest in bonds vs. stocks? Should some stay in cash?

In the finance biz, this is called asset allocation. It means how much money should be divided between different items, or assets, in a portfolio.

Our Old Enemy, Inflation

Looming inflation is one reason it’s important to invest your cash. As prices rise, our money’s value declines. Meaning the money in your savings won’t afford you as much in the future. Basic investing tactics says to make a return that’s better than the current inflation rate. That’s where stocks, mutual funds, and ETFs come in. These investment assets offer the most potential for a high return on investment, especially over a long-term approach.

But there’s no denying stocks are risky. Despite the historical positive returns of the S&P 500 over time, there is always a chance the markets tank for multiple years in a row. Given today’s media environment and how that drives the market, anything seems possible. So how do we protect our hard-earned dollas?

A tubby hippo snorts loudly.

Oh, hey there, bond market.

Dedicating part of your portfolio to bond investments helps lessen the market risk of your retirement money. Although bonds traditional receive lower returns than stocks, they are safer and provide a steady income. For example, U.S. Treasury bonds are generally thought to be a safe and liquid investment that will earn you a higher return than keeping all your money in cash.

The older you are, the more appeal bond investments have, as they are less risky investments.

Risk and Age Assessments

When buying chocolate, there’s a risk to trying something new. What if you hate it?

Let’s say you’ve never met a chocolate you didn’t like. Your chocolate risk tolerance is high.

If your investment risk tolerance is high, it means you are open to a wide range of investments, including more volatile ones.

When making your retirement account’s asset allocation percentages, personal risk tolerance plays a big factor. Stocks are volatile, bonds are less so.

Age also matters for asset allocation. A 30-year-old shouldn’t have same asset allocation as a 70-year-old. As a rule of thumb, the older you are, the less risky stocks you should own. Because if the market tanks (#2008), you have less time to make back that money. A 70-year-old also needs her retirement money more immediately.

Gimme the Good Stuff

Alright, we’ve cracked the nut on asset allocation basics. Time to get to the gooey center: how to determine your own asset allocation split.

There’s no one-size-fits-all for asset allocation, but some people have tried. As a starting point, some say subtract your age from 100 or 110 to determine a rough estimate of the percent stocks to own. For the 30-year-old, this would be 70%-80% (110 – 30 = 80 or 100 – 30 = 70). The other 20%-30% would go into bonds or other fixed-income assets. This calculation might be the perfect fit for you, or you might need to reduce or increase stocks exposure on your risk tolerance and personal circumstance.

Also, think about what age you want to retire and how much money you need at that age. Here’s a handy retirement calculator to help you figure that out.

About every six months or once a year, reassess your asset allocation and make sure you’re still where you want to be. As stock and bond prices go up and down, funky things happen to your percentages, possibly giving your portfolio more or less exposure than you’d like.

RECAP

Buying chocolate means tough choices. Same goes for retirement investing. There are lots of options for things to buy, and it’s hard to know where to sink your money.

Asset allocation: How much money to put towards stocks vs. bonds in a portfolio

Figuring out what percent to allocate towards bonds and stocks is the first step. Taking your age and risk tolerance into account, you can use the 100/110 rule to as a guideline to finding the right number. A general rule is the younger you are, the higher your risk tolerance should be.

Happy investing and chocolate eating.