Over time, the allocation of assets between stocks, bonds and cash will be the major determinant of the rate of return of your portfolio. If you hold bonds only, even great bonds, you will probably not achieve growth obtainable with stocks. If you hold stocks only, even shares of very stable firms like utilities and established food brands, your portfolio will be subject to occasionally dramatic declines. You will be well-served owning a mix of stocks and bonds. The mix should not be random but based on your tolerance for risk. Since stocks generally provide better returns in the long run, you want to maximize your stock holdings, but only insofar as you are comfortable with the extra volatility.
You may already know what percentage you want to invest in stocks and bonds. If this percentage is based on prior analysis or extensive experience owning securities, you are probably correct.
If you have not recently analyzed your risk profile, if you have yet to experience an entire investment cycle with bull and bear markets, or if your portfolio lacks either stocks or bonds, assess your tolerance by taking a quiz such as this one. Perhaps too brief to judge an entire regimen, it is nonetheless demonstrative and calibrated to convert risk-related views to a reasonable asset allocation.
For example, if you answered “3) I want to beat inflation…”, “4) A temporary drop of 15%”, and “4) Investment 4”, your answers would indicate a target stock allocation of about 55%. This should not be regarded as a recommendation or even a precise figure to aim for. It is just one input to help you understand the process and determine an appropriate range.
There are other online tools which can help you gauge an appropriate asset allocation. You may also find it helpful to peruse the charts below which display historical return data for asset allocations from 0% stocks through 100% stocks, with the rest in bonds.
If over time you find your portfolio too volatile or not gainful enough, consider adjusting your asset allocation appropriately. Experience should supersede a test and a chart.