What is asset allocation?
Asset allocation is the split of your portfolio across different asset classes: primarily stocks and bonds. A "60/40 portfolio" holds 60% stocks and 40% bonds. A "90/10 portfolio" holds 90% stocks and 10% bonds. The allocation determines your risk, volatility, and expected returns.
Stocks vs bonds: the basic trade-off
- Stocks: higher expected returns (~7–10% annually), higher volatility, riskier over short periods.
- Bonds: lower expected returns (~3–5% annually), lower volatility, safer over short periods.
Stocks are claims on company earnings; bonds are loans to governments or companies. In a downturn, stocks crash first and hardest. Bonds often hold steady or gain value, reducing overall portfolio pain.
Why bonds matter in a FIRE portfolio
A common beginner mistake is going 100% stocks because stocks have higher returns. But in FIRE, you will need to withdraw money during downturns. If your portfolio drops 40% in a crash and you have 40% bonds that drop only 10%, the bond portion keeps your portfolio afloat and allows you to avoid selling stocks at rock bottom.
This is called a "sequence-of-returns" risk hedge. It protects against retiring into a bear market.
Common allocation rules of thumb
- Age-based rule: stock allocation % = 110 − your age. A 35-year-old would hold ~75% stocks, 25% bonds.
- Target-date rule: as you approach FIRE, gradually shift more to bonds (e.g., 80% at 10 years away, 60% at 5 years away).
- Risk tolerance rule: only hold bonds if seeing a 30% drawdown would cause you to panic-sell. FIRE requires staying invested through downturns.
Testing your allocation
Pressure-test your allocation by looking at historical downturns:
- Check the 2008 financial crisis: a 60/40 portfolio dropped ~20%, versus ~57% for 100% stocks.
- Check 2022: bonds and stocks both crashed, but a 60/40 had less pain than 100% stocks.
- Ask yourself: if my portfolio drops 20%, will I panic and sell? If yes, hold more bonds.
Rebalancing keeps allocation on track
Over time, stocks outpace bonds (higher returns), so your allocation drifts. A 60/40 allocation can become 70/30 without rebalancing. Once yearly, sell some stocks and buy bonds to return to your target. This forces you to "buy low" and "sell high."
The practical allocation for FIRE
For most FIRE seekers aged 30–50 with a 10–20 year timeline:
- 70% total stock market index (US + international)
- 30% bond index
This allocation has weathered most downturns and allowed FIRE practitioners to retire on schedule. Adjust only if you have a shorter timeline (add bonds) or very high risk tolerance (increase stocks).