Asset Allocation
Asset allocation explains 91.5% of portfolio performance [@brinson1986]. Not stock picking. Not market timing. Just the mix of stocks, bonds, and other assets.
This is the only decision that matters for most investors.
The Only Free Lunch
In finance, higher returns usually require higher risk. There’s one exception: diversification.
By combining assets that don’t move together (stocks + bonds, US + international), you reduce volatility without reducing expected returns. Free risk reduction. Take it.
The Three-Fund Portfolio
For 99% of investors, this is the answer:
| Fund | Purpose | Example |
|---|---|---|
| Total US Stock Market | Domestic growth | VTI |
| Total International Stock | Global diversification | VXUS |
| Total Bond Market | Stability, income | BND |
Adjust the ratio based on age and risk tolerance. More stocks = more growth + more volatility. More bonds = more stability + less growth.
Simple rule: Bond allocation = your age (30 years old = 30% bonds). Adjust based on risk tolerance.
What Doesn’t Matter
- Which specific stocks to buy (index covers all of them)
- When to buy (time in market beats timing)
- Active fund managers (they lose to indexes)
The decision between 80/20 stocks/bonds vs 70/30 matters. The decision between VTI and VOO barely matters. Focus on what moves the needle.
91% of returns come from allocation. Stop obsessing over the other 9%.
See Automated Investing for implementation.