How much of your portfolio should be in stocks?
- Robin Powell
- 1 hour ago
- 8 min read
Most investors have never questioned how much of their portfolio should be in stocks. They've followed a simple rule, trusted it felt about right, and moved on. But that rule has a cost — a real, measurable one that compounds quietly over a lifetime. There's now a better answer. And it's simpler to use than you might expect.
Think about the last time you drove somewhere unfamiliar without a sat nav. Chances are you defaulted to the route you half-remembered — the main road, the obvious one, the one everyone uses. It probably got you there. You didn't question it much.
Investing has its own version of that road. Ask almost anyone how much of their portfolio should be in stocks, and you'll hear some variation of the same answer: subtract your age from 100, and whatever's left is your equity allocation. You're 40? Put 60% in stocks. You're 60? Drop it to 40%. Simple. Tidy. Everywhere.
Financial advisers repeat it. Personal finance books print it. Default pension fund structures are quietly built around it. It has the reassuring quality of received wisdom — the kind of advice that feels so obvious it must have been tested thoroughly before anyone bothered passing it on.
It wasn't, really.
A shortcut with a price tag
The familiar route doesn't just waste time. It costs fuel.
A November 2025 working paper from Yale economists James Choi, Canyao Liu, and Pengcheng Liu puts a precise number on that cost. Following "100 minus your age" produces a welfare loss equivalent to 2% of lifetime consumption compared to the genuinely optimal allocation. A static 60/40 portfolio fares worse: 3.75%.
Those percentages may sound modest. They aren't. Spread across a working life and into retirement, a 2% reduction in lifetime consumption shows up as extra years in the workforce, a smaller pot to draw from, or a retirement that starts later than it needed to. The 3.75% figure is roughly double, and entirely self-inflicted.
Millions of people are paying this cost without knowing it exists. The rule feels prudent. It feels cautious. For decades it's been handed down as though someone, somewhere, ran the numbers.
Someone finally has.
Why your salary is the bond you never knew you had
Your future salary is a financial asset. Not metaphorically — literally. And once you accept that, the whole question of how much of your portfolio should be in stocks looks completely different.
At any point in your working life, you hold something economists call human capital: the present value of all the wages and pension income you expect to receive between now and the end of your life. It's not listed on any brokerage statement. You can't sell it or transfer it. But it's real, it's substantial, and it belongs on your balance sheet.
For a 30-year-old on a stable salary of £50,000, that figure could easily run to several hundred thousand pounds — quite possibly more than their entire invested portfolio. The salary keeps arriving year after year, regardless of what markets are doing. It cushions losses. It funds contributions. It is, in the most practical sense, an enormous fixed-income position.
This isn't a new observation. Cocco, Gomes, and Maenhout established the foundations in a landmark 2005 paper, showing that human capital directly shapes the optimal allocation of any financial portfolio. What makes it concrete is the data. Research cited in Choi et al., using US household income records from 1980 to 2020, finds that the correlation between the average household's labour income growth and stock market returns is just 0.007.
Essentially zero. Wages don't go up when markets boom, and they don't collapse when markets crash. For most people in most jobs, salary behaves like a bond.
Which means the typical investor isn't a 60/40 portfolio. They're a financial portfolio sitting on top of a vast implicit bond holding that conventional rules ignore entirely.
A sat nav that doesn't know your starting point can't give accurate directions. "100 minus your age" treats everyone as though their only assets are the ones they can see.
Early in a career, with decades of earnings ahead, that implicit bond is enormous. Stocks can dominate the financial portfolio. As working life ends, the bond disappears. Equity allocation should decline — just from a much higher starting point than convention ever recognised, and for the right reason rather than a convenient one.
"The typical investor isn't a 60/40 portfolio. They're a financial portfolio sitting on top of a vast implicit bond holding that conventional rules ignore entirely."
What the optimal allocation actually looks like
For a young investor with modest savings and decades of earnings ahead, the optimal equity allocation isn't 70% or 80%. It may well be 100%.
That's the shape the Choi et al. framework recommends. Start high — very high for those early in their careers — then decline as financial wealth accumulates and human capital depletes. The curve doesn't look like "100 minus your age." It starts from a higher point, falls more steeply as wealth grows relative to remaining earnings, and converges toward a more conventional range later in life. The differences are largest where they matter most: in the years when compounding has the longest runway.
At age 30 with modest invested wealth, the optimal equity share sits near the top of the chart. By age 60 it has declined significantly, but the path is shaped by age and accumulated wealth together, not age alone. A 45-year-old with substantial savings holds less equity than a 45-year-old just starting out, because the financial portfolio is carrying proportionally more of the load.
Income volatility matters too. A teacher or civil servant, whose salary arrives reliably regardless of market conditions, holds bond-like human capital. A freelance consultant, a City trader, or anyone whose earnings move with economic cycles holds something closer to equity. Their human capital already behaves like a risky asset, so their financial portfolio should hold less equity to compensate.
The sat nav doesn't plot the average route. It calculates the optimal one for your journey.
The Choi approximation produces equity recommendations that correlate with the true theoretical optimum at R² = 0.99. The welfare cost of following it rather than the perfect solution is 0.06% of lifetime consumption, against 2% for "100 minus your age." Figure 6 from the paper shows why: a scatter plot so tight it barely deviates from the 45-degree line across thousands of parameter combinations.
How to calculate your own number
The spreadsheet is free, publicly available, and takes about ten minutes. Go to faculty.som.yale.edu/jameschoi/research, find the second working paper in the list — Practical Finance: An Approximate Solution to Lifecycle Portfolio Choice — and click the supplement link: "Spreadsheet that does the asset allocation calculation for you". Make a copy to your Google Drive.
That's entering your actual postcode rather than the national average starting point.
There are two tabs. "Full inputs" asks for detailed year-by-year income forecasts through to age 100: thorough, but impractical for most people. Start with "Wage imputed", which estimates your future income trajectory from your current salary alone.
The inputs are mostly self-explanatory. Risk aversion is the one that trips people up, but the spreadsheet includes a thought experiment: imagine a coin flip between spending £100,000 for a year or £50,000. A genie offers a guaranteed amount instead. The figure at which you'd be exactly indifferent maps to a number between one and ten. Investable net worth is non-housing assets minus non-mortgage debt, adjusted for deferred tax on retirement accounts.
For the expected real stock return, 5% is a reasonable starting assumption. For the real risk-free rate, UK readers should use the 30-year index-linked gilt yield as a proxy — currently around 1.5–2% real, though worth checking before you input a figure. For retirement income, enter your expected state pension where the guide refers to Social Security.
Two numbers come out: your recommended equity allocation, and the present value of your human capital. For many readers, the second will be the more surprising.
What the model doesn't know about your life
Even the best sat nav doesn't know about the roadworks that appeared this morning. It's still better than guessing.
The Choi model has real limitations. Housing is excluded entirely — if much of your wealth is in property, the model doesn't see it. Labour supply is assumed fixed, so career breaks, part-time working, and early retirement aren't accounted for. And the income profiles and pension structures are calibrated to the US, so UK readers need to exercise some judgement, particularly around state pension assumptions.
None of this is fatal. The output is a well-informed starting point, not a precise prescription.
The relevant comparison isn't between this model and a perfect one. It's between a framework that asks the right question — what does your total wealth, including future earnings, actually look like? — and a rule of thumb that never thought to ask it.
Your portfolio isn't the whole picture — it never was
"The largest asset most people own doesn't appear on any investment platform."
The rule of thumb felt like a safe answer. It was answering a simpler question than the one you're actually facing.
How much of your portfolio should be in stocks? You can't answer that properly by looking at your portfolio alone. The largest asset most people own doesn't appear on any investment platform. It's the stream of earnings and pension income still ahead — and for most people in most jobs, it behaves like a bond. Factor that in, and the question looks different. Often, significantly different.
Three things worth doing from here.
First, run your own number. The spreadsheet is free, takes ten minutes, and is linked from James Choi's Yale research page at faculty.som.yale.edu/jameschoi/research. Do it before your next portfolio review, not after.
Second, think honestly about your income. A stable public-sector salary is very different from freelance work or a commission-heavy role. Your human capital's riskiness shapes your optimal equity allocation in ways that age alone can't capture.
Third, if you work with a financial adviser, ask directly: given my human capital position, why is this allocation right for me? Any adviser defaulting to a 60/40 split or an age-based rule without that conversation is giving you half an answer.
The destination hasn't changed. You still want a portfolio that funds the life you're building. You just have better directions now.
Resources
Choi, J. J., Liu, C., & Liu, P. (2025). Practical finance: An approximate solution to lifecycle portfolio choice. NBER Working Paper 34166.
Cocco, J. F., Gomes, F. J., & Maenhout, P. J. (2005). Consumption and portfolio choice over the life cycle. Review of Financial Studies, 18(2), 491–533.
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