Mutual funds used as proxies for calculating the historical performance for the allocation models starting in December 2025 are:

Large-cap stocks: Vanguard 500 Index Admiral Shares (VFIAX)
Mid-cap stocks: Vanguard Mid-Cap Index Fund Admiral Shares (VIMAX)
Small-cap stocks: Vanguard Small Cap Index Admiral Shares (VSMAX)
International stocks: Vanguard Developed Markets Index Fund Admiral Shares (VTMGX)
Emerging market stocks: Vanguard Emerging Markets Stock Index Admiral Shares (VEMAX)
Intermediate-term bonds: Vanguard Intermediate-Term Treasury Index Admiral Shares (VSIGX)
Short-term bonds: Vanguard Short-Term Treasury Index Admiral (VSBSX)

More fund options for implementing the allocation models in a portfolio can be found in our Funds page.

Exchange-traded funds (ETFs) that can serve as proxies for the above allocation models include, but are not limited to:

Large-cap stocks: Vanguard 500 Index Admiral Shares (VOO)
Mid-cap stocks: Vanguard Admiral Mid-Cap Index ETF (VO)
Small-cap stocks: Vanguard Small Cap Index ETF (VB)
International stocks: Vanguard Developed Markets Index ETF (VEA)
Emerging market stocks: Vanguard Emerging Markets Stock ETF (VWO)
Intermediate-term bonds: Vanguard Intermediate-Term Treasury ETF (VGIT)
Short-term bonds: Vanguard Short-Term Treasury ETF (VGSH)

More exchange-traded fund options for implementing the allocation models in a portfolio can be found on our ETFs page

Prior to December 2020, the following mutual funds were used as proxies for calculating historical performance: Vanguard 500 Index Investor Class (VFINX), BNY Melon Mid Cap Index Investor Class (PESPX), Vanguard Small Cap Index Investor Class (NAESX), Schwab International Index, Schwab International Index (SWISX) and Vanguard Emerging Markets, Stock Index Investor Class (VEIEX), Vanguard Intermediate-Term Treasury Investor Class (VFITX) and Vanguard Short-Term Treasury Index Admiral ((VSBSX)

What Is Asset Allocation?

Asset allocation involves assigning a proportion of investment dollars to specific asset classes. An asset class is a broad category of related securities, such as equities, bonds, commodities (gold, oil, etc.), real estate and even alternative investments such as venture capital. Naturally, each asset class has various types of investments. Equities, for instance, include stocks, options, mutual funds and ETFs (exchange-traded funds).

These asset classes have different risk profiles and historical rates of return. The chosen blend significantly affects your expected growth, but also the likelihood of experiencing a given year with a substantial portfolio decrease. Investors diversify in this way (between and within asset classes) to protect gains while still gaining exposure to market price movements. There is no best asset allocation strategy because portfolio goals vary for each investor.

Asset Allocation Basics

Dividing capital among the various classes depends on risk appetite and investing timeline. Investors comfortable with risk typically place most of their capital—up to 90%—in stocks, while conservative investors place around 50% of their funds in fixed income. Because of their risk, stocks can offer higher rates of returns. Bonds, stable by their nature, generally offer modest returns, especially in today’s low-interest-rate environment.

Risk tolerance largely depends on the investing timeline. Young investors, not needing to draw down their portfolio for decades, should generally invest aggressively. Retired investors tend toward conservatism because they cannot risk a year with a 30% equity crash—they don’t have other income to supplement their portfolio. As the time to retirement decreases, investors tend to shift their asset allocation strategy to move funds from equities to bonds.

Wealth and cash flow also play a role. Those who will be spending a smaller proportion of their wealth or have guaranteed sources of cash flow (such as pension and Social Security benefits for retirees) can opt for a more aggressive allocation. Conversely, those who will be spending a large portion of their savings over a shorter period of time should consider a more conservative allocation.

Asset Allocation by Age

Again, these are general patterns; asset allocation by age varies by individuals’ needs. New investors may need money to buy a home and therefore might opt for a conservative asset allocation model. Those who retire early need their portfolios to last 35+ years, and thus will keep a larger exposure to the stock market.

A simple asset allocation rule to follow is to subtract your age from 100 and invest that amount in stocks. As bond yields have fallen, some retirement planners now argue that the rule should be modified to 110 or even 120. Regardless of which you choose, it gives a good indication of where to invest your funds.

What Is Tactical Asset Allocation?

Tactical asset allocation involves taking an active approach to the percent of a portfolio in any particular asset class based on expected market conditions. For example, a 45 year old may have 60% of her funds invested in equities. However, she expects that stocks will rise in the next five years because of a current recession. Therefore, she chooses to increase her stock asset allocation to 70%.

While this may sound obvious—buy low, sell high—it delves into market timing, which few experts endorse as investors generally overestimate their ability to identify market lows and highs. Instead, financial advisors generally recommend spending time and energy on successfully diversifying holdings within asset classes, not shifting the holding percentage between them in response to market conditions.

This diversification helps maximize returns within asset classes and ensures safe access to money when needed. On the equities side, investors should have exposure to large-cap, mid-cap, small-cap and international stocks (from emerging and established markets). Aggressive investors tend to have a higher percentage of funds in mid- and small-cap stocks and emerging markets than more conservative counterparts because of risk.

Bond diversification means choosing between short- and medium-term bonds. The longer the term, the higher the yield, but also the higher the risk that the issuer defaults or goes bankrupt. Until investors have a regular need to draw from their portfolio, bond allocation should be entirely in intermediate-term bonds. Generally, only conservative investors should park money in short-term bonds.

Recently, new target-date funds have emerged to simplify the asset allocation process. These funds have a target payout date and automatically adjust exposure to stocks and bonds as the years pass. For instance, someone who buys shares of a 2045 target-date fund (expecting to retire in year 2045) would automatically have their funds diversified appropriately. This benefits individuals who want a more passive approach to investing, but obviously comes with increased expenses and loss of control.

Putting It All Together

Asset allocation is the most important part of investing. It determines risk and expected return—both more so than the individual securities selected within each asset class. Figuring out the right asset allocation model for your goals is the first step to achieving them. Below, you’ll find AAII’s asset allocation examples for structuring your portfolio to maximize your returns.