How to choose an asset allocation

Asset allocation may sound abstract, but it is one of the biggest decisions you make as an investor. Tell me how much of a portfolio is in stocks and bonds, and I can tell you far more about how it is likely to behave than I can from the name of the fund holding them.

That is not as exciting as hearing about someone who bought a stock just before it soared, or someone who put an entire registered retirement savings plan (RRSP) into a penny stock and made a fortune. But those stories are usually the result of luck and are difficult to repeat. Asset allocation is deliberately less exciting. It is also something you can control.

Investing always involves a trade-off. You need to take some risk to earn a return, but you do not need to risk everything. Asset allocation finds a balance between risk and return that still lets you sleep at night.

For a simple portfolio, that means deciding how much to hold in stocks and how much to hold in bonds. Stocks are expected to earn more over the long term, but their prices can rise and fall sharply over shorter periods. Bonds generally fluctuate less, but they also tend to offer a lower long-term return.

It is difficult to predict which one will do better next year. That is one reason to hold both rather than betting everything on one outcome.

In the short term, stocks can feel like a roller coaster. They can climb or fall quickly, and you cannot control the ride. Your financial adviser cannot control it either. Money you need soon, such as a down payment for a home next year, should not depend on what the stock market happens to do. Money for a goal decades away, such as retirement, has more time to recover from a decline.

Bonds help reduce those short-term swings. They are not risk-free, but they usually move less than stocks. The price of that stability is a lower expected return.

Choosing the proportion of stocks and bonds comes down mainly to two things: your time horizon and your tolerance for risk.

Your time horizon is how long the money can remain invested. The longer it is, the more stock-market risk you may be able to take because there is more time to recover after a decline. Someone investing for retirement several decades away might choose 90% stocks and 10% bonds. Someone already drawing from a portfolio might choose 60% stocks and 40% bonds.

These are examples, not rules based on age. A long horizon does not help if a large decline causes you to panic and sell.

Your risk tolerance is your willingness to accept a financial loss. If a falling portfolio keeps you awake at night, you may be taking more risk than you can tolerate. Reducing the proportion of stocks and increasing the proportion of bonds can make the portfolio easier to live with.

Risk tolerance is more art than science, but a risk questionnaire can help you think through it. Answer based on how you would actually react to a loss, not how you hope you would react. When in doubt, it is better to take a little less risk than to build a portfolio you will abandon during the next decline.

Asset allocation in practice

The 2026 Long-Term Strategic Asset Allocation report from CIBC Global Asset Management compares five globally diversified portfolios. These are not generic stock-bond mixes. Their stock allocations include Canadian, U.S., international, and emerging-market equities. Their fixed-income allocations include Canadian and global bonds.

Using benchmark data from September 1988 through December 2025, CIBC reports the following historical annualized returns for those allocations.

Stocks	Fixed income	Historical annualized return
25%	75%	7.18%
40%	60%	7.80%
60%	40%	8.64%
75%	25%	9.08%
90%	10%	9.56%

Over the same period, the worst one-year return is the worst rolling 12-month period, while maximum drawdown is the largest decline from a peak to a trough.

Stocks	Fixed income	Worst one-year return	Maximum drawdown	Months to recover
25%	75%	-10.48%	-12.48%	21
40%	60%	-14.55%	-17.29%	10
60%	40%	-21.45%	-26.03%	20
75%	25%	-25.89%	-31.69%	24
90%	10%	-30.68%	-37.87%	46

The contrast is clear. The 90% stock portfolio returned 9.56% annually over the historical period, but suffered a 37.87% drawdown and took 46 months to recover. The 60% stock portfolio returned 8.64% annually, fell 26.03%, and recovered in 20 months.

These are hypothetical benchmark results, not fund returns, and future losses could be larger. But they make the trade-off difficult to ignore.

That is not a flaw in asset allocation. It is the trade-off. Higher expected returns come with a rougher ride.

Choosing your asset allocation should not be taken lightly. Too much risk can make you panic when markets fall and sell at the worst possible time. Too little risk can leave your money growing too slowly for the job it needs to do, while inflation quietly eats away at its purchasing power.

The right allocation is not the one with the most stocks or the highest projected return. It is the one that gives your money room to grow without asking you to endure a loss that would make you give up on the plan.