How your investment dollars are allocated has a big impact on the performance of your portfolio. Let's take 1999 for example. Had you had 100% of your money in technology stocks, 1999 would have been a very, very, good year. On the other hand, had you had 100% of your assets in bonds, you are probably glad 1999 is over.

In most cases, investors allocate investments across a variety of investment classes in order to reduce risk. This is called diversification. In essence, you diversify in order to avoid having all of your eggs in one basket. Thus, prudent investors will diversify across various stock types (large stock, small stocks, international stocks) as well as across various asset classes (stocks, bonds, cash, real estate, etc.), and across various industry categories.

While asset allocation is certainly an intuitive concept, less intuitive is to know just how much money you should have in each asset class. How much should you have in stocks and stock mutual funds? Bonds? Cash?

Of course, one portfolio allocation strategy does not fit all. People are different; they have different feelings toward risk. Their financial situations are different. Thus, it is often incorrect to assume that what is a good asset allocation for one person is good for another.

However, one reasonable rule of thumb to use as a starting point for allocating your assets between stocks and bonds is the following: Subtract your age minus 110, and that is the percent of your assets that you should have in stocks/stock mutual funds.

Using this rule of thumb, a 55-year old would have roughly 55% (110-55) of his or her assets in stocks and stock mutual funds. The remainder would be divided between bonds and cash.

But what if you are a 55-year old who has a strong investment portfolio, a high comfort level with risk, a healthy pension, and few financial responsibilities? You probably have the ability to be more aggressive, perhaps upping the stock portion of a portfolio to 70%-75% or so. On the other hand, what if you are a 55-year old whose financial assets are limited and you have a great aversion to risk? You might want to have a smaller percentage of assets in stocks.

Bottom line: There is no best way to allocate assets between stocks and bonds. But this rule of thumb does provide a useful benchmark when beginning the process.