Free course · Module 3
Asset Allocation: Stocks, Bonds and Cash
Your mix matters before you pick individual investments. Understand the roles of stocks, bonds and cash, see how market moves change their weights, and practice rebalancing without mistaking an example for a personal plan.
Written by the StockEducation Editorial Team · Reviewed by Associate Professor Charles Lo, CPA, PhD · Updated 19 Oct 2026 · How we check lessons
Pick a topic to learn
Read in order, or return to the idea you need.
Idea 1 of 4
Give each asset a job.
Asset allocation is the split among investment categories. Stocks represent company ownership; bonds are loans with repayment terms; cash and cash equivalents can help meet near-term spending. Each has risks, including price falls, default or lost purchasing power. Source 1.
The split below is a fictional teaching example. It does not say that 60% stocks, 30% bonds and 10% cash is suitable for you. A real portfolio also needs attention to what is inside each category.
$30,000
$15,000
$5,000
$30,000 + $15,000 + $5,000 = $50,000.
Diversify within the categories as well as between them
Allocation sets the broad mix; diversification also depends on what you hold.
Idea 2 of 4
Match the mix to the money’s purpose.
Begin with when the money is needed and what losses it could withstand. A short deadline leaves less time to recover from a fall. A long horizon does not eliminate losses, and your willingness to stay invested may differ from your financial ability to do so.
The same birthday can sit beside very different goals: a house deposit due soon and retirement decades away. An age rule cannot capture both. The familiar “110 minus age” stock percentage is only a rough heuristic; 110 − 40 = 70%, not a suitability assessment.
A fixed spending deadline
A distant, flexible goal
Ability to take a loss
Would a fall force a sale to meet bills or planned withdrawals?
Willingness to take a loss
Would anxiety make you abandon the plan during a decline?
Consider the deadline, cash needs and response to a loss together.
Historical examples show both cushioning and its limits
Why bonds and cash are not risk-free labels
Test the loss you could fund and the loss you could emotionally tolerate.
Idea 3 of 4
Bring a drifting mix back to target.
Market moves can change your risk even when you make no trades. Suppose stocks in the fictional $50,000 portfolio rise 20% while bonds and cash are flat. The balance becomes $56,000, with about 64.3% in stocks rather than the starting 60%.
Rebalancing returns the holdings to a chosen target. It controls the mix; it does not guarantee a gain or tell you which market will rise next. Check transaction costs and tax consequences before making changes. Source 1.
60% stocks · 30% bonds · 10% cash
$30,000 · $15,000 · $5,00064.3% stocks · 26.8% bonds · 8.9% cash
$36,000 · $15,000 · $5,00060% stocks · 30% bonds · 10% cash
$33,600 · $16,800 · $5,600$1,800 goes to bonds and $600 to cash. The $56,000 total stays the same before costs.
Choose a review rule before the market moves
Target-date funds: check more than the year in the name
A rebalance restores a target; it does not remove investment risk.
Idea 4 of 4
Test a mix before you rely on it.
Change one weight and see the same scenario through different mixes. Start with a fictional $50,000. Cash stays at 10%; the slider divides the remaining 90% between stocks and bonds. Pick a one-period scenario and compare the ending balance and stock weight.
How does the mix change the result?
One period · fictional $50,000Starting mix: 60% stocks · 30% bonds · 10% cash.
After the moves: 50.3% stocks · 37.7% bonds · 12.0% cash.
Change from the $50,000 start: −$8,250.
Cash return is 0% in every scenario. Return = starting stock weight × stock return + starting bond weight × bond return + 10% × 0%. No fees, taxes, inflation or cash flows. Returns are assumptions, not forecasts; weight labels round to one decimal.
Apply the idea with a hypothetical profile
Use an example to understand the mechanism, not to outsource the decision.
Quick check
Three quick checks. Feedback straight away.
A fictional $50,000 portfolio holds 60% in stocks. What is the starting dollar stock allocation?
Choose an answer to see the explanation.
What does the 2022 example show about stocks and bonds?
Choose an answer to see the explanation.
Which action can move a portfolio toward its target without selling an investment?
Choose an answer to see the explanation.
Review your takeaway card and the learning path
- Give assets a job. Understand stocks, bonds and cash separately.
- Match the goal. Horizon, loss capacity and willingness all matter.
- Expect changing weights. Market moves create drift.
- Check the limits. Rebalancing and target-date funds cannot guarantee outcomes.
Reading markers and these practice checks stay on this device. They do not mark the LMS lesson complete.
Sources and assumptions
- SEC: Asset Allocation, Diversification and Rebalancing. Asset categories, goals, horizon, risk tolerance, diversification and ways to rebalance.
- SEC: Target Date Funds. March 2025 bulletin: to/through glide paths, varying mixes and fees, and lack of guaranteed retirement income.
- SEC: Interest Rate Risk. Fixed-rate bond prices and market interest rates; market value when selling before maturity.
- Aswath Damodaran, NYU Stern: Historical US Returns. January 2026 data; S&P 500 including dividends and 10-year Treasury series for the selected 2008 and 2022 examples.
Sources checked 19 October 2026. Fictional allocations and scenario returns teach arithmetic, not recommended holdings. Historical examples use the cited series and exclude fees and taxes; future outcomes can differ. Local reading and practice controls do not mark an LMS lesson complete.
StockEducation provides general education, not personal financial, tax or legal advice. Nothing here recommends a specific security. Investing involves risk, including loss of money you invest.
