Asset allocation basics: stocks, bonds, cash, alternatives

Why allocation is the decision that dominates

Most of the attention in investing goes to picking funds and stocks. Most of the outcome comes from a decision made earlier: how much of your money sits in stocks, how much in bonds, how much in cash. Studies of institutional portfolios have long attributed the large majority of return variation to the allocation, not to security selection. Get the split right for your situation and the fund choice becomes a detail; get it wrong and no fund can rescue you.

So before comparing expense ratios to the second decimal, the useful work is understanding what each asset class actually is. Not what it is marketed as — what it is.

Stocks: ownership of business earnings

A stock is a fractional claim on a company's future earnings. That is the whole thing. When you own the shares, you own a slice of whatever cash those businesses generate, forever, and the long-run return reflects that: broad equity markets have delivered roughly 7–10% per year in nominal terms over long periods.

The price of that return is drawdown. Equities have fallen more than 50% twice since 2000, and a 30% drop is not an anomaly but a recurring feature. Nothing about the historical average protects you from a decade that starts badly. Stocks are the growth engine precisely because most people cannot hold them through the worst stretches.

Bonds: lending, with the yield known in advance

A bond is a loan. You hand over capital, receive interest, and get the principal back at maturity — the yield at purchase is, for a bond held to maturity, roughly the return you will get. That predictability is the appeal, and it is real.

The risks are also real: rising interest rates push existing bond prices down, and inflation erodes the fixed payments. 2022 made the lesson concrete — broad bond indices fell 10–15% in a single year, at the same time as stocks. "Bonds are the safe part" is a habit of speech, not a law of nature. Shorter maturities mean smaller price swings; safety in bonds is something you choose, not something included by default.

Cash: optionality, bought with a slow guaranteed loss

Cash does two things well. It covers emergencies without forcing you to sell anything at a bad moment, and it lets you act when opportunities appear. Both are worth paying for.

The payment is inflation. At 2% inflation, cash loses about half its purchasing power over 35 years — slowly, invisibly, and with certainty. Cash is a tool, not an investment; the mistake is not holding some, it is holding a lot for decades and calling it caution.

Alternatives: honest words about each

Property generates rent and tends to track inflation, but it comes with leverage, concentration, illiquidity and maintenance — a rental flat is a small business, not a line item. Gold produces nothing; it has held purchasing power over very long stretches and has gone sideways for entire decades in between. Commodities are raw-material price bets with no internal engine of return. Private assets — private equity, venture, unlisted credit — can be genuine businesses underneath, but the fees are high and the smooth-looking returns owe a lot to infrequent pricing.

A general rule I apply: when a product is sold with "uncorrelated" as the headline rather than a footnote, the correlation is usually the product and the returns an afterthought. Diversification that only works in a brochure is expensive.

The old heuristics and their limits

The classic rule — equity share of 100 minus your age, so a 30-year-old holds 70% stocks — encodes something true: the shorter your horizon, the less time you have to recover from a drawdown. As a starting point it is fine.

As an answer it is not. It ignores whether you have stable income, debts, dependants, or a pension already doing the bond-like work; it ignores, above all, how you actually behave when your portfolio is down 40%. An allocation you abandon in a crash is worse than a more cautious one you keep. The right split is the most aggressive one you can hold through the worst year without selling.

What I do — disclosure, not a template

For the record: I run essentially all equities plus a cash buffer, and have since I started investing publicly in August 2020 — every position and the exact cash weight are visible, along with the sector mix and where in the world it sits. My horizon is measured in decades, I use no leverage, no shorts, no derivatives, and I will not be forced to sell — which means volatility is a cost I can carry rather than a risk that can end me. That is a description of my situation, not a recommendation for yours.

Two things come before any allocation maths, in my view. An emergency fund outside the portfolio, so the market never dictates your timing. And the sleep test: if a plausible bad year would make you sell, the allocation is wrong regardless of what the spreadsheet says. Optimise after those two are settled, not instead of them.