Pick a mix. Then keep it from drifting.
the only two decisions that compound for thirty years
The recipe
is the slice of your money in stocks, bonds and cash. More stocks means more upside and bigger drops. More bonds means less of both. There is no objectively correct mix, only one you can live with through a deep crash without selling. Pick it, write it down, and the single decision that matters most for thirty years is done.
Cautious, balanced, aggressive.
What each looks like in normal years and in the worst year you should be ready for. Real returns are net of inflation, illustrative.
Cautious
Near retirement, low tolerance for drops.
Balanced
Long horizon, average appetite for risk.
Aggressive
Decades to go, can stomach a deep crash.
The market drifts your portfolio for you
Stocks rise faster than bonds in most years, and that alone is enough to move your portfolio without you placing a single order. Start with $60 in stocks and $40 in bonds. Stocks gain 10 %, bonds gain 3 %, and at the end of year one you have $66 and $41.20. The total is bigger, but stocks now occupy 61.6 % of the pie instead of 60 %. You sold nothing. The market did it. Repeat five times and you are running a 68/32, a more aggressive portfolio than the one you chose, right before the next crash.
60/40 left alone for five years.
Assuming stocks return 10 % and bonds 3 % per year. Each bar is the mix at the end of that year. By year 5, you are running a much riskier portfolio than the one you started with.
Dashed line marks the 60 % target. The bars rise on their own because stocks compound at 10 % and bonds at 3 %: their share of the pie grows without you selling a single position.
Three honest ways to bring it back
means selling what has grown too large and buying what has shrunk, until the mix matches your target again. There are three honest ways. Pick one and stick with it; the worst rebalancing strategy is the one you change every year.
Pick one. Stick with it.
By calendar
Once a year, on the same date.
Simple. Predictable. Easy to put on a calendar and forget the rest of the year.
Can trigger taxable sales every year, even when your portfolio has barely moved.
By threshold
Only when one slice drifts more than 5 percentage points from target.
Action only when it actually matters. Fewer trades, fewer taxes than the calendar version.
You have to check periodically. Tools or alerts help.
By contributions
Every new euro you add buys whatever is below target. No selling.
No taxable sales. Often the cleanest method while you are still in the saving phase.
Stops working when contributions are small relative to portfolio size, usually near retirement.
Best while you are still adding money: contributions. Best near retirement: threshold.
If stocks crash 40 % at the end
Deterministic projection. Stocks 7 %/yr, bonds 2 %/yr, no inflation. Drift = no rebalancing ever; target = rebalanced once a year. Real markets bounce around these averages, but the direction of the drift is the same.
Pick a mix you can live with. Then keep it that way.
Asset allocation is the only decision that compounds for thirty years. Rebalancing is the only behaviour that protects it. Everything else, market timing, hot stocks, the next bubble, is noise.