As easy as A, B or C

How well your savings do depends crucially on which asset classes they are invested in, of which there are around half a dozen. But this mix can be simplified even further to just two groups. The boring, which deliver a dependable return; and the bouncy, with  higher risk and potentially  higher return. 'Boring '  includes cash and government bonds [gilts]. 'Bouncy' includes shares and property. Deciding on this mix is one of the most important decisions a saver makes. Chances are they never actually make a conscious decision.  The split is normally described in shares/bonds terms; but bouncy/boring is what it means.

• Adventurous : 67/33. Two-thirds of your savings could be in shares
• Balanced: 50/50. An equal split
• Cautious: 25/75. Relatively cautious, but still a quarter in 'bouncy' assets.

Why not go for 100% shares in 'Adventurous'?

Studies have shown that you gain a smoother ride, without sacrificing a lot of the return by having  some boring assets in the mix. Besides savers often overestimate their appetite for risk. If [when] shares crash their instinct is to bail out, leaving themselves with a big loss.

I can take it, I am going for the max: 100%

The max isn't 100%. You could borrow money and invest 200% of your net wealth, or 500%. This is called leverage or gearing. It's a quick way to get rich. Or not rich. But either way it's quick.

What's so great about 50:50 then?

If markets are just bouncing around without going anywhere in particular, then 50:50 is the best place to be - because rebalancing takes advantage of these fluctuations.

And what so special about 25% shares, apart from a fascination with the ratios 1:1, 1:2, 1:3?

Well suppose you get a 3% return [dividends and interest] in a year, but your share portfolio crashes by half [that's 12.5% of your savings wiped out], you have still managed to keep your net losses to single figures for the year.

That's a psychological reason, not an economic one

True

I think I'll go for maximum safety - 100% bonds

Oddly, a slice of shares can even help here too, adding extra return without adding any extra 'bounce'.

And a slice is what exactly...?

8.3333%

!

Ok - say a twelfth. One study found 7% in shares, and 93% bonds, was smoother than 100% in bonds. You had to go all the way to 12%  shares before they started to add extra bounce [aka volatility]. Its one reason why it's common in the USA for advisors to suggest a minimum of 20% shares. That, and the commission. So suggesting that your  spinster aunt take £10 000 of her precious £120 000 life savings and invest it in shares is actually quite prudent.

So what is best for me?

It depends. On your willingness to take risks. On your likely future income. Stable [aka boring] job prospects allow you to take more risks. The career civil servant can afford to have a riskier mix than the  highly paid city trader with an uncertain future. Many pension funds opt for a 60/40 split between shares/bonds.

Thats for me then..

But you are not a pension fund. Your time horizons are shorter. In the USA many individuals nearing retirement hold 40/60. More bonds than shares.

Isn't there a simple rule?

There's lots. One is 'your age in bonds'.  The 'Cautious' portfolio would then fit a 75-year old. Another rule is to reduce your risks if you can't sleep at night. Don't forget vanilla investing requires that you buy more shares [aka rebalance] as they drop in value, to keep your asset allocation on track. Another rule is not to invest more than you can afford to lose.

I am OK about taking risks...

I know -  its just losses  you can't handle. One can have one's attitude to risk measured by answering a questionnaire, but its a bit like asking  the theoretical question: 'do you think you will get sea sick?'. Watching your net worth sink as your savings are caught in a financial storm is really sickening, and few people are prepared for it, despite their brave words beforehand.