Which specific ETF you choose matters less than how you split your money between stocks and bonds. That split is called asset allocation, and it is the main driver of how much your portfolio grows and how far it falls.
A portfolio’s asset allocation is the percentage in each. “80/20” means 80% stocks and 20% bonds.
Two questions set your mix.
1. When do you need the money? Money needed within a few years should not be mostly in stocks, because there may not be time to recover from a fall. Money for retirement decades away can ride out several bad years.
2. How much of a fall could you sit through without selling? The best allocation is the one you can hold in a crash. A mix that makes you sell at the bottom is worse than a milder one you keep.
| Mix (stocks/bonds) | Often suits | If stocks fall 40% and bonds are flat |
|---|---|---|
| 100 / 0 | Very long horizon, high tolerance | −40% |
| 80 / 20 | Long horizon | −32% |
| 60 / 40 | Medium horizon or moderate tolerance | −24% |
| 40 / 60 | Shorter horizon or low tolerance | −16% |
The last column is simple arithmetic: stock share × the fall. It is a stress test, not a prediction, and bonds are not always flat when stocks fall.
A bond ETF holds many bonds and replaces them as they mature, so the fund itself never matures. Its price moves with interest rates, in the opposite direction: when rates rise, existing bonds are worth less.
The key number is duration, shown on the fact sheet in years. It tells you roughly how sensitive the fund is to rates.
Example. A bond ETF has a duration of 7. If rates rise by 1 percentage point, its price falls by roughly 7%. If rates fall by 1 point, it rises by roughly 7%. A short-term bond ETF with a duration of 2 would move only about 2%.
After a fall, the fund’s bonds pay higher yields going forward, which helps it recover over time. As a rule of thumb, if you hold a bond ETF for at least as long as its duration, the higher income tends to offset the price drop.
An allocation is not fixed forever. As the date you need the money gets closer, it usually makes sense to hold less in stocks and more in bonds and cash. This gradual shift is sometimes called a glide path.
Change your mix because your life changed: a shorter timeline, a new goal, a different capacity for loss. Do not change it because of headlines or a forecast.
Educational purposes only; not financial advice. Any funds, tickers and figures are illustrative examples, not recommendations. Fees, tax rules and contribution limits change, so confirm current details with the fund provider and your tax authority. Worked examples use constant returns and are not forecasts. Written by Elizabeta Dimoska. Always do your own research and consult a licensed advisor.