How Much Should You Have in the Stock Market?
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How should you allocate your portfolio between cash, bonds, and stocks?
How much should you have in and out of the stock market? Yep, we're talking asset allocation on this Saturday, personal finance edition of Motley Fool Money.
I'm Robert Brokamp and it's the first Saturday of the month, which means it's time for the next installment of our 2026 Financial Planning Challenge. Because it's such an important topic, we're going to skip the headlines this week and devote more time to discussing what to consider when apportioning your portfolio. So here we go. It's month three of A Year Well Planned, our 2026 financial planning challenge. In the previous two months, we covered coming up with systems to monitor your spending and your net worth. This month, we're moving on to your portfolio and how spicy it should be given your circumstances and tolerances. And joining me to talk about it is certified financial planner and chartered financial analyst, Amanda Kish.
Amanda, welcome back. Thank you so much. I'm so glad to be back. The purpose of this discussion is to help listeners determine the right amount to have in the stock market, basically, and maybe the amount to keep out as well as what type of stocks to consider. And as people might suspect, we're going to talk about the term risk tolerance, but we're actually going to start with something that might be more important, and that is risk capacity. So Amanda, what do we mean by that? So risk capacity is really the structural side of the risk equation. It's not about how you feel about volatility. It's about what your financial life can actually afford to absorb without putting your short-term, long-term goals at risk.
So one good analogy that I've seen is that risk tolerance is your stomach and risk capacity is your seatbelt. So one's emotional, one is mechanical, and you need both to properly assess your individual risk profile. And the factors that go into risk capacity are things like how long until you need this money. So if you're 35 and saving for retirement, you have a very different runway than someone who is 58 or 63. And then similarly, income stability is a factor. As an example, a tenured professor and a freelance contractor might have an identical net worth, but very different capacities to ride out a bad year. And then your liquidity situation factors in as well, meaning if the market dropped 30% tomorrow and you also got hit with a big unexpected expense, would you be forced to sell investments at exactly the wrong time?
Or do you have cash to cushion those short-term bumps? So these are all of the factors that can help to shape an investor's risk capacity. Now, so if you're a few years from a goal, right, you should probably be playing it safe with that money. Here at The Fool, we generally say that any money you need in the next three to five years should not be in the stock market. Historically speaking, the S&P 500 is profitable in 84% of three-year holding periods, 88% of five-year holding periods, 94% of 10-year holding periods. So that's sort of where that three- to five-year guideline comes from. But, you know, history does say that even a 10-year holding period doesn't guarantee gains, so you should adjust it for your circumstances and preferences.
And I agree with your point about how someone should consider their human capital. In other words, their jobs, right? So years ago, retirement expert Dr. Emotion Molesky wrote a book called Are You a Stock or a Bond? With the point being, you know, there are some people who have these jobs that are very safe, provide dependable and predictable income. So they're kind of like bonds, which means those people, theoretically at least, could take more risk in their portfolios. Then you have jobs that are much more up and down in terms of the income and how much they're affected by economic downturns. And if you have that type of job, maybe you should play it safer with your portfolio. And then just another consideration is, regardless of your job, you might consider whether you want to overinvest in stocks in the same industry as your employer, because you may not want too much of your net worth riding on in your portfolio and your income riding on the future of the same industry.
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