Your Mix: Stocks, Bonds and Cash

The story: Lee stops chasing funds

Lee stops switching between funds and picks one overall mix of stocks, bonds and cash across two accounts.

1. Narrator: Lee has a 401(k) from work and an IRA. Each year, Lee switches to whatever fund did best last year.
2. Lee: I keep switching, and I never know if I’m doing it right.
3. Narrator: Most of your risk and growth comes from your mix of stocks, bonds and cash, not from finding the perfect fund.
4. Narrator: Stocks grow most over time but swing. Bonds are steadier. Cash is safest but can fall behind rising prices.
5. Lee: Retirement is about 20 years away. But if my balance dropped by a third, I’d want to sell everything.
6. Narrator: So Lee picks 60% stocks, 30% bonds and 10% cash, a mix Lee can stick with, counted across both accounts.
7. Narrator: Pick a mix you can stick with in a bad year.

What you’ll learn

1. Each part has a job

   Stocks have grown the most over long periods, but they can drop sharply in a year. Bonds are steadier and pay interest. Cash is the safest, but over many years it can lose ground to inflation. Your mix of the three is called your asset allocation.

2. Pick by timeline and by nerves

   Money you won’t need for decades can ride out more swings. Money needed soon can’t. A good mix also fits how you’d act in a bad year. A mix someone would abandon in a drop is the wrong mix for them, even if it looks good on paper.

3. Target-date funds do the shifting

   A target-date fund holds a mix and shifts it slowly toward bonds and cash as its year gets closer. That slow shift is called a glide path. It’s a simple way to keep a mix that fits your timeline.

4. One portfolio, many accounts

   Count all your accounts together when you check your mix: workplace plans, IRAs and regular investment accounts. Spreading money across many investments and kinds of investments is called diversification.

Key words

asset allocation

how your money is split among stocks, bonds and cash

diversification

spreading money across many investments so one can’t sink you

risk tolerance

how much ups and downs you can live with, in money and in nerves

glide path

how a target-date fund shifts its mix safer over time

Common questions

Is there a “right” mix for my age?

There are rules of thumb, but the right mix depends on when you need the money and how you’d act in a drop. Target-date funds offer one starting point.

Where do I find what’s inside a fund?

Each fund has a fact sheet that shows its mix of stocks, bonds and cash, plus its yearly fee.

Remember this

Pick a mix you can stick with in a bad year.

Try it: Find your overall mix

1. List each investment account and its balance.
2. For each one, note roughly how much is in stocks, bonds and cash. Fund fact sheets show this.
3. Add them up to find your overall mix as percentages.

No account needed: your statements, the funds’ fact sheets and a sheet of paper.

Live facts

Numbers that change over time, with when they were last checked and where they come from.

• Asset allocation and diversification basics

  Source: Investor.gov (SEC)(opens in a new tab)

• Thinking about your risk tolerance

  Source: Investor.gov (SEC)(opens in a new tab)