Asset Allocation by Goal & Horizon

The driver of everything

Study after study (Brinson et al.) finds asset allocation — the stocks/bonds/cash split — explains the overwhelming majority of a portfolio's return VARIANCE, dwarfing security selection and timing. The allocation decision IS the portfolio; everything else in this course refines it.

Horizon sets the split

The logic: stocks are high-return/high-volatility; over LONG horizons the volatility averages out (day 9) and the return wins; over SHORT horizons you might sell into a dip. Rule of thumb: money needed within ~3 years does not belong in stocks at all; 3–10 years = balanced; 10+ years = stock-heavy. The classic heuristic "100 − age in stocks" is a starting point to be adjusted for personal risk tolerance (day 32) — not a law.

The personal overlay

Two adjustments matter more than any formula: risk TOLERANCE (what drawdown can you hold through without selling — day 32) and risk CAPACITY (what drawdown can your FINANCES absorb — job stability, timeline, obligations). A portfolio that violates either gets abandoned at the worst moment, which converts a paper drawdown into a real loss. The best allocation is the one you will actually hold.

Sources

• Asset AllocationInvestopedia
• Determinants of Portfolio PerformanceBrinson, Hood & Beebower