Stocks vs. Bonds: Asset Allocation Basics and How to Pick Your Mix

Start with the question underneath the product question

New investors often begin with a product comparison: should I buy a Taiwan stock ETF, a US Treasury ETF, or a global fund? That is a reasonable question, but it comes after a more important one: how much of this money can handle market volatility, and how much needs to stay steady?

Asset allocation is the framework for answering that. You divide the portfolio into broad asset classes, set a target weight for each, and only then choose the funds or ETFs that implement the plan. It is not a forecast about what will win next month. It is a way to decide which money is there to grow and which money is there to make the ride easier to stay on.

That order matters. Owning many different stocks can still leave you exposed to the same industry, country, or economic shock. A plain stock-bond mix may look less exciting, but it makes the portfolio's risk visible. If stocks have a rough period, you already know how much of the whole portfolio is supposed to move with them and how much has a different job.

What stocks and bonds actually are

The short version is simple: a stock is a small piece of a company; a bond is a loan to a government or company in exchange for interest. Investor.gov's introduction to bonds describes bonds as fixed-income products because the issuer borrows from investors and promises interest and repayment under stated terms.

When you own a stock, your result depends on what happens inside the company and on what other investors expect to happen next. Better-than-expected business results can lift the price; weaker prospects, competition, or a change in sentiment can push it down. A stock is not a guaranteed growth button. It is an ownership claim whose market value moves with a company and with the market around it.

With a bond, you are closer to the lender than the owner. You care about whether the issuer can repay, the interest terms, the maturity, and the market value if you need to sell before maturity. A fixed-rate bond can also change price when interest rates change. If new bonds start offering higher rates, an older bond with a fixed payment may become less attractive and its market price can fall. If rates move the other way, that fixed payment can look relatively better.

That is why stocks and bonds often do not move in lockstep. Stocks react more directly to expected company profits, economic growth, and risk appetite. Bonds react strongly to interest-rate expectations and the credit quality of the issuer. The same headline can matter differently to each side. But “different rhythm” does not mean “always opposite.” A shock involving inflation, rates, or credit can push both down at once. Diversification reduces dependence on one source of risk; it does not remove risk.

Why mix them: the return-volatility trade-off

The next two tables are illustrations, not historical performance and not a promise. Assume a starting portfolio of NT$1,000,000 (New Taiwan dollars), a fixed annual return of 7% for stocks and 3% for bonds, and one rebalance each year. There are no additional contributions, withdrawals, taxes, fees, or trading costs in this example. The blended return is the weighted assumption, compounded forward.

The point is not to circle the row with the largest ending balance. Under these assumptions, more stocks produce a larger long-run balance, but they also ask you to tolerate a rougher ride. More bonds lower the illustrative return while giving the portfolio another source of stability. That second job matters because a plan only works if you can keep following it when the screen is red.

Now imagine one bad year. Assume stocks fall 30% while bonds rise 5%. Again, this is a made-up scenario for explaining the math, not a forecast:

For the 80／20 mix, the stock side contributes 80% × −30%, while the bond side contributes 20% × +5%. The portfolio result is −23%. That is still a loss, just a smaller one than the all-stock example. This is the real reason to hold bonds: not to earn more than stocks, but to make it less likely that a bad year scares you into selling everything.

Bonds can fall too, of course. The +5% in the example is only the assumption supplied for this illustration; it is not a rule about what bonds do. The best mix is not the one that looks prettiest in a spreadsheet. It is the one whose downside you can live through without rewriting the plan in a panic. Return and volatility are not two separate checkboxes. They arrive as a package.

How to choose a mix: 110 minus your age is only a starting point

If you need a simple place to begin, try the rough rule “110 minus your age equals your stock percentage.” It is a shortcut for making the stock share gradually smaller as the date you need the money gets closer. Vanguard's Principles for Investing Success makes the broader point: allocation belongs alongside goals, time horizon, and risk tolerance, rather than standing in for all of them.

Here is what that shortcut would suggest:

That table does not mean every 30-year-old should hold 80／20, or that every 60-year-old must hold 50／50. Age is an easy proxy, not a complete answer. Ask yourself three better questions:

• When will I need this money? Retirement money that is far away and a deposit you must make soon are different jobs. A shorter deadline leaves less room for a market drop to recover before you need the cash.
• Could I sleep through a 30% stock decline? This is not a test of bravery. It is a test of whether you would abandon the plan halfway through. A portfolio that looks aggressive on paper but makes you sell in fear is not an executable allocation.
• Is my emergency fund separate? Investments should not also be the money that pays next month's unavoidable bills. The guide on how much an emergency fund should cover can help you separate short-term resilience from long-term investing.

Income stability, dependents, and a clearly named goal can all change the answer. You may be young and still need the money soon. You may be older and have other reliable cash flow. Use the age rule to start the conversation, then let the job of the money and your actual behavior do the editing.

Tools available to investors in Taiwan

The list below gives names and types only. It is a translation from an allocation label into recognizable tools, not a product ranking. It intentionally leaves out expense ratios and return figures.

Names, underlying holdings, listing details, and product documents can change. Check the issuer, such as Yuanta ETFs, and the Securities Investment Trust & Consulting Association for current information. An omnibus brokerage and an overseas broker also have different account, currency, and trading conditions. This list explains the categories; it does not recommend a broker or bank.

If you want to see how domestic stocks, international stocks, and bonds can be organized into three broad holdings, the Bogleheads three-fund portfolio is a useful framework to study. It is a framework, not a universal answer for every country, tax situation, or account type.

Rebalancing is not chasing winners

Rebalancing means bringing the actual weights back toward the targets you chose. In practice, that can mean selling some of what recently grew and buying some of what lagged. It feels backward, which is exactly why a written rule helps. The goal is not to predict the bottom or trade every headline; it is to keep the portfolio's risk from quietly changing.

Two simple approaches are checking once a year or adjusting only when a sleeve is 5 percentage points away from its target. Pick the rule you will remember. Checking every day can turn normal price movement into noise; never checking can let a temporary winner become a permanent risk decision by accident.

Take the 80／20 example. Suppose the target is 80% stocks and 20% bonds, but a stock rally leaves the actual portfolio at 85% stocks and 15% bonds. Under a 5-percentage-point threshold, you could sell stock equal to 5% of the whole portfolio and buy bonds until the mix returns to 80／20. The 5% here is the gap in the total portfolio, not 5% of the stock position.

While you are still adding money, directing new contributions to the underweight sleeve can also reduce how often you need to sell. Before making a real transaction, check the rules, costs, and tax treatment that apply to your own account. The allocation decision cannot answer those account-specific questions for you.

How to start in three steps

You do not need a complicated investment policy document on day one. Start with three practical steps:

1. Calculate your net worth. List cash, investments, and other assets, then subtract liabilities so you know the size of the base you are allocating. The guide on how to calculate net worth walks through the categories, and the free net worth calculator can turn the list into a snapshot.
2. Choose a ratio with a reason. Write the time horizon, your reaction to a 30% stock decline, and the status of your emergency fund next to the target. The age rule or a 60／40 mix can be a starting point; the important part is knowing why you picked it.
3. Invest on a repeatable schedule. Direct new money according to the target mix and use a process you can keep during good and bad markets. The Forrest Gump investing example shows how a boring, automatic contribution habit can remove many small decisions.

After that, resist the urge to add every asset category at once. First learn to see whether you are overweight in stocks, bonds, or cash, and whether you can follow your own rebalance rule. A simple plan that survives real life is more useful than a clever plan that gets redesigned whenever the market feels exciting.

Three common misunderstandings

Misunderstanding one: bonds cannot fall. They can. Rising rates can put pressure on the market price of older fixed-payment bonds, and a change in the issuer's credit condition can matter too. Bonds are a different kind of risk, not cash with a guaranteed market price.

Misunderstanding two: young investors should be 100% in stocks. Age can suggest a time horizon, but it cannot measure your tolerance or tell you when the money will be spent. A young person saving for a near-term goal may need a different mix from a young person saving for a distant goal. The right allocation is one you can hold through the 30% decline in the illustration.

Misunderstanding three: once the allocation is set, you never need to look at it. Market movement changes the weights. Rebalancing is not day trading; it is the occasional return to the risk level you intentionally chose, using a yearly check or a 5-percentage-point threshold.

In short: let the mix make fewer decisions for you

Stocks provide the possibility of growth; bonds put a different source of risk and return beside them. Neither is a guaranteed-profit button. Start with the time horizon, your behavior in a downturn, and a separate emergency reserve. Then choose a simple mix, write down the rebalance rule, and give the plan enough time to do its job.

There is no single correct stock-bond ratio for every reader. A good starting mix is one you understand, can afford to hold, and will still follow when the market is unpleasant. The numbers and your life will change. A yearly check is enough to ask whether the allocation still matches the job the money needs to do.