How Much of Your Money Should Be in Stocks?
How much of your money should be in stocks? Your risk capacity — time horizon, income stability and cash buffer — sets the ceiling. Nerve can only lower it.
How Much of Your Money Belongs in Stocks? Stop Guessing (Explained by a Banker)
Prefer to watch? This article is the written companion to the video above.
Two people sit down to invest on the same afternoon, and both say the same sentence: “I’m comfortable with risk, go aggressive.”
One is 28, steady job, no debt. The other is 58, hoping to retire in four years, in a job that has started to look shaky.
Same feeling about risk. When the market next falls hard — and sooner or later it will — it barely scratches the first person and could wreck the second. Not because one of them was braver. Because only one of them could afford it.
The short answer
Nobody can give you a percentage without knowing about your life, and the ones who do are guessing on your behalf.
What sets your number is how much risk you can afford, which you can check. What can then lower it is how much you can stand, which you can only estimate. Facts set the ceiling. Nerve can pull you below it and must never push you above it.
That ordering is the whole decision.
Two things, one label
Ask most people about their risk profile and you get a mixture of two things that behave nothing alike.
Two different things, one label
Both get called "your risk profile". Only one of them is evidence.
The feeling
Risk tolerance
How much falling you can stomach without selling.
- Established by
- Asking you
- Measured when
- On a calm afternoon
- Answers about
- A version of you that does not exist yet
- Can change
- With mood, news, and the last twelve months
- Its job here
- It can lower your number. Never raise it.
The fact
Risk capacity
How much falling your life can absorb without forcing a sale.
- Established by
- Checking three things
- Measured when
- Any time — the inputs sit in your bank account
- Answers about
- Your actual obligations and cash flow
- Can change
- With a job, a mortgage, a child, a redundancy
- Its job here
- It sets the ceiling.
Risk tolerance is the feeling — and look at how it gets established. You answer a questionnaire on a calm Tuesday afternoon. How would you feel if your portfolio dropped 20 percent? You tick “I would stay invested.” What you have just done is predict the behaviour of a person who does not exist yet: the version of you watching real money vanish in a real fall.
That prediction runs optimistic, and there is a well-documented reason. Losses hurt more than equivalent gains feel good, which is the asymmetry Kahneman and Tversky set out in Prospect Theory back in 1979. My favourite illustration of how strong it is comes from Nicholas Barberis, reviewing the field in 2012: most people turn down a coin flip that loses them $100 or wins them $110. The odds are in their favour and they still say no. If a small favourable bet is already unappealing on a calm afternoon, the calm version of you has no business forecasting the panicked one.
Risk capacity is the other thing. It is how much falling your finances can absorb before something actually breaks — and unlike a feeling, you can work it out with a calendar and a bank statement.
The regulator drew this line, and then found people ignoring it
This split is not something I invented for a video. It is written into how regulated firms are supposed to advise.
UK conduct rules require a firm to establish both the risk a customer is willing to take and the risk they are able to take. The regulator’s shorthand for the second is capacity for loss, defined as the customer’s ability to absorb falls in the value of their investment (FSA, Assessing suitability, FG11/05, March 2011).
What makes that document worth opening is not the definition. It is the audit that came with it.
Of the investment files the regulator assessed as unsuitable between March 2008 and September 2010, half failed on this exact point: the investment chosen did not match the risk the customer was willing and able to take. And of 11 risk-profiling tools reviewed, nine had weaknesses capable of producing flawed outputs. The regulator’s own summary of the common failure is that most advisers consider a customer’s attitude to risk, while many fail to take appropriate account of their capacity for loss.
So if you have ever filled in one of those questionnaires and quietly suspected the label at the end was doing more work than the evidence supported, that instinct has regulatory backing.
The three facts that set your ceiling
Capacity sounds abstract until you see what it actually rests on. Three inputs, each checkable against a date, a contract or an account balance.
What actually sets your ceiling
Three inputs. Not one of them is a feeling — each can be checked against a bank statement, a contract, or a date.
Time horizon
When do you actually need this money?
More capacity — Decades away — a fall has years to recover before you touch it
Less capacity — Three years or less — you might have to sell while you are down
Horizon decides whether a fall is noise or a realised loss.
Income stability
Is money still arriving, with something left over?
More capacity — Steady salary with a surplus — you keep buying while prices are marked down
Less capacity — Shaky income, or you already live off the portfolio
Income decides whether a fall is a discount or a liquidation.
Cash buffer
Can a bad month be paid for without touching investments?
More capacity — Months of spending held in cash — your life is funded from outside the market
Less capacity — No buffer — your portfolio is your emergency fund
The buffer decides whether the market gets to choose the day you sell.
Time horizon decides whether a fall is noise or a realised loss. Money you will not touch for twenty years has time to recover before it matters. Money you need in three does not, and the loss becomes permanent the moment you sell into it.
Income stability decides whether a fall is a discount or a liquidation. A steady salary with something left over each month quietly converts a crash into a buying opportunity. Unstable income takes that away, and income you are already drawing from the portfolio can force a sale at the worst possible moment. That mechanism is the whole subject of how forced selling crashes markets: the sellers who do the damage are rarely the ones who changed their minds.
The cash buffer decides who chooses the day you sell. With one, your life is funded from somewhere the market cannot reach, and you wait. Without one, your investments are your emergency fund.
The buffer is the least interesting item in this article — and probably the most important. Which is why how big your emergency fund should be got its own episode, and why the three-bucket structure puts it underneath everything else rather than beside it.
None of the three is a feeling. That is the whole reason a bank asks for them and not for your opinion.
One thing about how they combine, because it trips people up. Capacity is limited by its weakest input, not the average of the three. A twenty-year horizon and a healthy buffer do not rescue a portfolio you are already living off.
”110 minus your age” deserves a fairer hearing than it gets
Here is where most articles on this topic reach for the easy dismissal, and I think they get it wrong.
The rule is everywhere: put 110 minus your age into stocks, the rest in bonds. At 30 that means 80% stocks. At 70 it means 40%. It is the answer people fall back on when they want a number and not a conversation — and the standard criticism is that it is crude.
So let us test it properly, against a real institutional glide path rather than against theory.
Vanguard publishes the path it actually runs for its target-date investors. It starts at 90% equity at age 25, decreases to 50% at 65, and lands at 30% around 72 (Vanguard, May 2025).
The rule of thumb against a real glide path
Share held in stocks. Amber is "110 minus your age". Green is the path Vanguard actually runs for its target-date investors.
The rule holds 5 points less in stocks.
The rule holds 5 points less in stocks.
The rule holds 8 points more in stocks.
Through the working years the rule sits about five points below the professional path — close enough to look credible. Then it inverts: at 72 it holds eight points more in stocks than Vanguard does, at the age when a forced sale does the most damage.
Look at what that comparison actually says. At 25 the rule prescribes 85% where Vanguard holds 90%. At 65 it prescribes 45% where Vanguard holds 50%. Through the entire span of a working life, a rule you can do in your head sits within about five points of what one of the largest asset managers on earth runs with a research department behind it.
That is not a crude rule. That is a good approximation, and pretending otherwise is the kind of easy contrarianism that makes financial writing untrustworthy.
Then look at the third row. At 72 the rule says 38% and Vanguard says 30%. The rule has crossed over and become the more aggressive of the two, at precisely the age when a forced sale does the most lasting damage, and it keeps drifting further out with every year you live. A rule that is conservative for forty years and then turns bold at the finish is a strange thing to trust with the part that matters most.
But the arithmetic is still the smaller objection, and I want to be clear about that, because the eight-point gap is the sort of detail that gets quoted while the real problem gets missed.
The real problem is that age is a stand-in for one input out of three. It is a decent proxy for time horizon — and completely blind to the other two. It does not know whether your income is secure. It does not know whether you hold six months of spending in cash or nothing at all. Our 58-year-old from the opening and a 58-year-old with a government pension, a paid-off house and two years of expenses in a savings account get an identical answer from the rule — and one of them is being badly served by it.
And then there is the detail that finishes the argument, which I did not expect to find in Vanguard’s own paper. The glide path is built, in their words, for a generalised baseline participant who is sharing limited personal information. It is a sensible default for someone the fund knows almost nothing about. They are not hiding this; it is stated plainly as a design constraint.
You are not that person. You know your own income, your own buffer, your own dates. Using a population default when you hold the personal information is throwing away the only real advantage you have over a target-date fund.
Use the rule as a sanity check, by all means. If your own answer lands thirty points away from it, that gap deserves an explanation. Just do not let it be the answer.
Then you take the smaller one
Fact and feeling combine in one direction only.
- Work out capacity first. Horizon, income, buffer, honestly assessed. That gives you a ceiling.
- Hold the ceiling up against the feeling. If you can live with it, you have your answer and you are done.
- If it would genuinely stop you sleeping, come down until it does not.
- Never go the other way. The most fearless investor alive still gets wrecked if a fall forces a sale at the bottom.
If you want the feeling measured rather than guessed, the risk tolerance assessment here scores it across several dimensions instead of one question, and it translates each allocation into the worst calendar year that mix has historically delivered. That last number is the useful one. It is what your nerve has to sit through without doing anything clever.
The question underneath both of them
There is a quieter question that almost nobody asks, and it can move your answer further than either of the other two.
How much risk do you actually need to take?
If your savings rate and your horizon already get you where you are going at a moderate allocation, extra risk buys volatility and nothing else. There is no medal for carrying the most risk you can survive.
Where this goes wrong in practice
- Treating the questionnaire result as the answer instead of one input into it. Nine of eleven tools had weaknesses. The label is a starting point.
- Letting a good year raise their tolerance. Nothing about your capacity changed because the market went up. When an allocation drifts upward after strong returns while the circumstances behind it stand still, that is the feeling driving, and rebalancing is the mechanism that exists to correct it.
- Confusing “I can handle a fall” with “a fall cannot hurt me.” The first is a claim about temperament. The second is a claim about cash flow, and only the second protects you.
- Setting the number once and never returning. A mortgage or a redundancy can move capacity inside a week.
- Ignoring what the gap costs. The distance between what a portfolio returned and what its investors actually earned, the behaviour gap, is built largely from decisions taken at the moment capacity ran out.
I should be honest about a limit here. None of this reduces to a formula that spits out a percentage, and anyone selling you one has quietly assumed the answers to the three questions on your behalf. The framework narrows the range and rules out the numbers you cannot defend. It does not hand you a single figure, and I would not trust a source that claimed otherwise.
Ten minutes, three questions
Write the answers down. Not in your head, where they stay comfortably vague.
- When do I need this money? A date, not a feeling. Inside three years is a different regime from beyond ten.
- How secure is the income behind it? Would six months without work mean selling something?
- How many months of spending sit in cash? Count it, do not estimate it.
Those three give you a ceiling. Then take the risk assessment and see whether your nerve wants to sit lower. If it does, sit lower — deliberately, with the reason written next to the number.
Writing it down is the step everyone skips and the one that holds. An investment policy statement can be five lines on one page: the allocation, the three facts behind it, and what would have to change for it to move. Its real job is to be sitting there during the next crash, in your own handwriting, on the morning when the calm version of you who answered the questionnaire has left the building.
This is educational content, not financial advice, and nothing here is a personal recommendation. Rules, taxes and products differ by country, and your circumstances are specific to you. If a decision matters, it could be worth having it reviewed by a qualified professional before you act.
Primary sources
- 01Assessing suitability: Establishing the risk a customer is willing and able to take — defines capacity for loss as the customer's ability to absorb falls in the value of their investment; reports that of the investment files assessed as unsuitable between March 2008 and September 2010, half failed on the risk the customer was willing and able to take; and that of 11 risk-profiling tools reviewed, nine had weaknesses that could lead to flawed outputs — Financial Services Authority (now the FCA), FG11/05, March 2011
- 02Choice of equity landing points can benefit target-date investors — states that the Vanguard Target Retirement glide path starts at 90% equity at age 25, decreases to 50% at age 65 and lands at 30% around age 72, and that the path is built for a generalised baseline participant sharing limited personal information — Vanguard Thought Leadership (Kimberly Stockton and Vivien Chen), May 2025
- 03Prospect Theory: An Analysis of Decision under Risk — the paper that established that losses loom larger than equivalent gains — Daniel Kahneman and Amos Tversky, Econometrica 47(2), March 1979
- 04Thirty Years of Prospect Theory in Economics: A Review and Assessment — reports that loss aversion is inferred from the fact that most people turn down a 50/50 gamble that loses $100 or wins $110 — Nicholas C. Barberis, NBER Working Paper 18621, December 2012
Questions people actually ask
How much of my money should be in stocks?
There is no single percentage that is right for everyone, and any source that gives you one without asking about your life is guessing. The share you can justify is set by your risk capacity: how many years until you need the money, how stable your income is, and whether you hold enough cash to cover a bad year without selling. Work those three out first, because together they give you a ceiling. Then check that ceiling against your nerve, and come down if you would not sleep. Coming down is allowed. Going above the ceiling because you feel brave is not, because a market fall that forces you to sell does damage no amount of courage undoes.
What is the difference between risk tolerance and risk capacity?
Risk tolerance is how much falling you can stomach without panicking. It is a preference, and it is established by asking you. Risk capacity is how much falling your finances can absorb without forcing you to sell. It is a fact, and it is established by checking your time horizon, your income and your cash buffer. The distinction is not a private framework: UK conduct rules require firms to establish both the risk a customer is willing to take and the risk they are able to take, and the regulator uses the term capacity for loss for the second, defining it as the customer's ability to absorb falls in the value of their investment (FSA, Assessing suitability, FG11/05, March 2011).
Is 110 minus your age a good rule for stock allocation?
It is a better approximation than it deserves to be, and it fails in a specific place. Compared with Vanguard's published target-date glide path, which starts at 90% equity at age 25, decreases to 50% at 65 and lands at 30% around 72, the rule sits about five points lower through the working years. Then it inverts: at 72 it prescribes 38% in stocks where Vanguard holds 30%, so it drifts highest exactly when a forced sale hurts most. The deeper problem is what it cannot see. Age is a rough stand-in for time horizon only. The rule knows nothing about whether your income is secure or whether you hold a buffer, and those are two of the three inputs that actually set capacity.
How do I work out my own risk capacity?
Answer three questions with evidence rather than impression. First: what is the date you expect to need this money, and is it inside three years or beyond ten? Second: is income still arriving with a surplus to invest each month, or are you already drawing on the portfolio? Third: how many months of spending could you cover from cash without selling anything? Strong answers on all three mean a market fall stays an inconvenience. A weak answer on any one of them lowers the ceiling regardless of how the other two look, because capacity is limited by its weakest input rather than by its average.
Should I hold fewer stocks if market falls make me anxious?
Yes, and that is the legitimate role of the feeling. If a level of risk would genuinely make you sell at the bottom, then it is not the right level for you, however well it scores in theory. The order matters though: establish the ceiling from the facts first, then let your nerve trim it down. A portfolio you can sit through at 50% stocks beats one you abandon at 80%. What the feeling must never do is work in the other direction, because being comfortable with risk does nothing to stop a redundancy or a short horizon from forcing a sale.
Does a bigger cash buffer let me hold more in stocks?
Mechanically, yes, and that is precisely what a buffer buys. It funds your life from somewhere the market cannot reach, so a fall never has to be turned into a realised loss to pay a bill. Without one, your investments are your emergency fund, and the market chooses the day you sell. This is why the buffer is the foundation of the whole structure rather than a dull first step: it converts a paper fall into something you can wait out. The size that makes sense depends on how stable your income is, which is the same question that sets the second capacity input.
How much risk do I actually need to take?
This is the question most people skip, and it can move your answer more than either of the others. If your savings rate and your time horizon already get you to your goal at a moderate allocation, taking more risk adds volatility without adding purpose. There is no medal for carrying the most risk you can survive. Work out what return your plan actually requires, and treat any risk beyond that as a choice you are making rather than a default, which is a choice worth making deliberately if at all.
How often should I revisit my risk capacity?
Once a year, and again whenever one of the three inputs changes. A new job, a mortgage, a child, a redundancy, or simply moving five years closer to needing the money all shift capacity, sometimes sharply. Tolerance drifts too, usually with the last twelve months of returns, which is exactly why it should not be the thing setting your allocation. Writing the decision down, with the reasoning, makes the annual review an actual check rather than a fresh guess.