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How a stock and bond mix shifts with age

A glide path is the stock and bond mix set by age. The illustrative default falls in a straight line from 90 percent stocks at age 25 to 30 percent at age 85, so age 40 reads 75 percent stocks and 25 percent bonds, an illustrative yearly standard deviation of 13.80 percent.

At age 40

75% stocks

25% bonds on the path you have drawn.

Illustrative risk at that mix

13.80%

Yearly standard deviation, a growth leaning mix.

StocksBonds75%0%50%100%2540557085reading the mix at age40

Drag either end of the path to set the opening and closing mix, and the middle to steepen or flatten the years in between. Every dot also takes the arrow keys.

Along the whole path the illustrative risk reading runs from 16.3% at age 25 to 7.3% at age 85, passing 11.4% at 55. The path is a straight line, the same points off stocks every year.

Illustrative teaching values. The mix is stocks and bonds only, and the risk reading holds stocks at 18 percent yearly standard deviation, bonds at 6 percent and their correlation at 0.15, round figures picked so the reading moves clearly. An age-based path is a starting point rather than an answer, and nothing here is a forecast or advice.

In short

  • Drag the left end of the path to set the stock share at age 25, and the right end to set it at age 85.
  • Drag the middle of the path up to hold stocks for longer, or down to cut them early.
  • Drag the age rail under the chart to read the mix and the illustrative risk at any age between the ends.
  • Focus any dot and use the arrow keys to work the same four controls without a pointer.

What the two bands show

Every vertical slice of the chart is one whole portfolio at that age. The lower band is the stock share, the upper band is the bond share, and the line between them is the glide path you are dragging.

w(a)=w0+(w1−w0)(a−2560)kw(a) = w_0 + (w_1 - w_0)\left(\frac{a - 25}{60}\right)^{k}

Here w0w_0 is the stock share at the young end, w1w_1 the share at the old end, and kk the bend. At k=1k = 1 the path is straight and the same number of percentage points comes off stocks every year. Above 1 the path holds stocks through the middle years and cuts faster near the end. Below 1 it cuts early and then runs almost flat.

The opening straight line is what a subtract your age rule draws: the stock share is 115 minus the age at every point on it. A rule like that is a starting point rather than an answer, because age is the only thing it knows about you.

Capacity and tolerance are different things

Risk capacity is how much of a fall your plan can absorb. It comes from the years before the money is spent, how steady the income paying into it is, what else could be sold instead, and whether the pot is drawn all at once or over decades. Age is a rough stand-in for the first of those and silent on the rest, which is why two people the same age can have very different capacity.

Risk tolerance is something else: how much of a drawdown you can sit through without selling. It is about behaviour, not arithmetic, and it does not shift on a birthday.

The mix that actually works is the lower of the two. Capacity without tolerance draws a path a reader abandons at the bottom, and a portfolio sold at the bottom never earns the return the chart was drawn on. Tolerance without capacity leaves a plan short of what it has to fund.

What the risk reading assumes

The figure beside the mix is a yearly standard deviation of returns, so it measures how widely results spread rather than how much is lost.

σp=w2σs2+(1−w)2σb2+2w(1−w)ρσsσb\sigma_p = \sqrt{w^2\sigma_s^2 + (1-w)^2\sigma_b^2 + 2w(1-w)\rho\sigma_s\sigma_b}

Stocks are held at 18 percent, bonds at 6 percent and the correlation between them at 0.15. Those are illustrative teaching values, round numbers picked so the reading moves clearly as the mix changes, not measurements of any market and not a forecast.

On those inputs the reading runs from 18 percent at all stocks to 6 percent at all bonds. It never reaches zero, because bonds carry risk of their own, and it falls more slowly than the stock share does once the mix is already bond heavy.

Common questions

Does the shape between the two ends matter?

It decides the middle years, and by then a balance has usually had decades of paying in and compounding behind it, so the same percentage-point difference applies to far more money than it did at the start. Holding the default ends fixed at 90 percent and 30 percent, the age 55 reading runs from about 43 percent stocks on the earliest cut to about 83 percent on the latest, a spread of about 40 percentage points from the bend alone. Two paths can share both ends and be very different portfolios for thirty years.

Is a rule like subtract your age from a fixed number enough?

It is a reasonable opening position and a poor final one. The rule takes one input, your age, as a proxy for the years before the money is needed. It knows nothing about how secure the income paying in is, what else you own, whether the money is drawn all at once or over decades, or whether you would sell at the bottom. Start there and adjust from what you know about your own capacity and tolerance.

Why does the risk reading fall more slowly than the stock share?

Because bonds are not still. Cutting stocks from 90 percent to 30 percent takes two thirds of the stock share out and moves the reading from 16.30 percent to 7.32 percent, a fall of about 55 percent. Going the rest of the way to no stocks at all only reaches 6 percent, which is the volatility of the bond side on its own.

Keep reading

This page is educational material, not financial advice. The figures come from the formula shown and assume the inputs you enter hold for the whole term. Your own rate, fees, taxes and timing will differ, so treat the output as arithmetic to check a decision against, not as a recommendation.