Asset Allocation

Why allocation dominates

A portfolio of 100% stocks and a portfolio of 100% bonds behave very differently. Over 30 years, the stock portfolio will likely triple the bond portfolio in ending value — but along the way, the stock portfolio will have multiple 40% drawdowns that the bond portfolio will not.

Fund selection matters at the margin (a 0.05% expense ratio fund beats a 0.75% expense ratio fund of the same asset class, meaningfully over decades). But whether you're 80/20 or 20/80 determines the character of your entire financial experience. Get the allocation right first.

The basic mix

Three main building blocks:

• Stocks — growth engine. High expected return, high volatility.
• Bonds — stabilizer. Moderate expected return, low volatility.
• Cash — liquidity. Low expected return, near-zero volatility.

A classic starting point is "your age in bonds" — a 40-year-old holds 40% bonds, 60% stocks. This is an oversimplification but illustrates the idea that allocation should track time horizon.

A more nuanced framework uses target-date-fund rules of thumb:

• Age 25–35: 85–100% stocks, 0–15% bonds
• Age 35–45: 75–90% stocks, 10–25% bonds
• Age 45–55: 65–80% stocks, 20–35% bonds
• Age 55–65: 50–70% stocks, 30–50% bonds
• Age 65+: 40–60% stocks, 40–60% bonds, with 2–5% cash for near-term spending

These are starting points. Your specific situation — income stability, other assets, risk tolerance, goals — should shift the numbers.

The 60/40 portfolio

The 60/40 portfolio (60% stocks, 40% bonds) has been the default "balanced" portfolio for decades. It delivers roughly 70% of the return of a 100% stock portfolio with about 60% of the volatility — an attractive trade-off for retirees and conservative investors.

It had a rough 2022 when both components fell together, prompting "is 60/40 dead?" headlines. The answer is no; that was an unusual environment driven by the fastest rate hikes in decades. Normal recoveries have pushed 60/40 back to its usual role.

Sub-allocations

Within stocks, common sub-allocations:

• U.S. vs international: 60–70% U.S., 30–40% international is a common split. Pure market-cap weighting would be closer to 60/40 in favor of U.S., but home-country bias is defensible.
• Large-cap vs small-cap: usually market-weighted (small-caps are a small fraction of U.S. equity value).
• Growth vs value: usually market-weighted, though some investors tilt toward value based on academic factor research.

Within bonds:

• Short-term vs intermediate vs long-term: intermediate is the default; short-term for lower rate sensitivity; long for higher duration exposure.
• Treasuries vs corporate vs TIPS: a total bond market index holds all three in rough market proportions.

Complexity doesn't help returns. A three-fund portfolio (total U.S. stock, total international stock, total bond) captures most of the benefit of diversification without requiring you to manage 10 funds.

How Horizons uses this

Your Horizons assets each have an investment strategy that determines expected return and volatility. The effective asset allocation is the value-weighted mix of strategies across your portfolio. Allocation schedules drive glide paths — automatic shifts toward more conservative strategies as retirement approaches.