Week 21 Day 7: Size and Geography: Match Your Allocation to Your Timeline

If you have 30+ years to invest, a tilt toward small-cap value and international stocks gives you exposure to the highest-expected-return corners of the market. If you need the money in 10 years, large-cap domestic stocks with low volatility are more appropriate. Match the risk to your timeline.

Sample allocations by life stage: Early career (25-35): 60% VTI, 25% VXUS, 10% VBR (small-cap value), 5% BND. Why: maximum growth exposure, long time to recover from volatility. Mid-career (35-50): 50% VTI, 20% VXUS, 5% VBR, 25% BND. Why: still growth-oriented but adding stability as retirement gets closer. Pre-retirement (50-60): 40% VTI, 15% VXUS, 45% BND. Why: protecting wealth while maintaining some growth to outpace inflation. Retirement (60+): 35% VTI, 10% VXUS, 50% BND, 5% short-term TIPS. Why: income and capital preservation with enough stock exposure to maintain purchasing power over a 30-year retirement. These are starting points, not prescriptions. Risk tolerance matters as much as age. A 55-year-old with a $5 million portfolio and a pension can afford more risk than a 35-year-old with $50,000 and unstable income. The golden rule: if a market decline of any holding would cause you to sell, you have too much of it.

The life-cycle investing literature provides a more nuanced framework than simple age-based rules. Bodie, Merton, and Samuelson (1992) showed that optimal equity allocation depends on the flexibility of labor supply: workers who can adjust hours or extend their career have more 'human capital insurance' against market declines, justifying higher stock allocations. Cocco, Gomes, and Maenhout (2005) modeled optimal portfolio choice with labor income risk and found that the optimal stock allocation for a young worker is approximately 80-100% -- consistent with conventional advice. However, they also found that workers with volatile employment income (commission-based, startup equity, cyclical industries) should hold less stock because their human capital already has equity-like risk. Merton's (2014) 'Goal-Based Wealth Management' framework replaces the traditional risk-tolerance questionnaire with a minimum acceptable outcome for each financial goal. The portfolio is then constructed to maximize the probability of achieving all goals while controlling downside risk, using elements of liability-driven investing (LDI) and risk budgeting. This approach naturally produces the conventional wisdom (more stocks when young, more bonds when old) but with important personalization based on income stability, spending flexibility, and the priority of specific goals. The key insight: your investment allocation should not be a static rule but a reflection of your total balance sheet -- human capital, Social Security, home equity, and financial assets combined.