Research shows approximately 90% of long-term portfolio return variation comes from asset allocation decisions — how money is distributed across asset classes (stocks, bonds, cash, real estate) — not from market timing or security selection. This finding, from Brinson, Hood, and Beebower’s classic 1986 study, is one of modern portfolio theory’s core pillars.
## Main Asset Classes
**Stocks (equities)**: highest expected long-term return; highest short-term volatility. US market (S&P 500) historically averaged ~10% annually (~7% real). Chinese A-share returns show higher volatility with results varying substantially by observation period.
**Bonds (fixed income)**: lower expected return than stocks; substantially lower volatility. High-quality bonds (government bonds) typically perform well during sharp equity drawdowns, providing portfolio stability.
**Cash and money market**: safest; lowest yield. Money market funds (Yu’E Bao etc.) are common Chinese investor cash management tools.
**Alternative assets**: gold (safe haven, low stock correlation), real estate (REITs or physical), commodities. Low correlation with stocks and bonds makes modest allocation beneficial for diversification.
## Determining Stock-Bond Mix
**Age rule of thumb**: 110 minus your age ≈ suggested equity allocation percentage. Age 30: 80% stocks/20% bonds; age 50: 60/40; age 65: 45/55. This is a rough starting point — adjust based on actual risk tolerance.
**Risk tolerance reality check**: “If my portfolio dropped 30% tomorrow, what would I do?” If the answer is “probably sell everything” — your actual risk tolerance is lower than you think; reduce equity allocation.
**Classic portfolio references**: Beginner: CSI 300 index fund 80% + China bond fund 20% (simple two-fund portfolio). Global: A-shares 30% + US/global index 30% + bonds 30% + gold 10%. Target Date Funds: multiple Chinese fund companies offer 2030/2040/2050 series that automatically reduce equity allocation over time.
## Rebalancing
Market movements cause portfolio allocations to drift from targets. When stocks rise from 60% to 70% of the portfolio — sell some stocks, buy bonds, restore the 60/40 target. This process is rebalancing.
Rebalancing frequency: annually, or when any asset class drifts more than 5% from target. Rebalancing’s discipline forces systematic “sell high, buy low” behavior (rising assets get trimmed; fallen assets get added to) — a key operation for maintaining the portfolio’s long-term character.
See [Index Fund Investing](https://sunqi.org/index-fund-investing-basics-en/), [FIRE](https://sunqi.org/financial-independence-fire-en/), and [Vanguard asset allocation research](https://advisors.vanguard.com/insights/article/strategicassetallocation).
