Asset allocation, glide path and rebalancing

The decision that most determines your portfolio's risk and return is not which specific fund you choose, but the split across broad asset classes: how much in equities (stocks), how much in fixed income (bonds) and how much in cash. Getting that proportion right matters far more than picking the "winning stock".

Risk capacity vs. risk tolerance

Two different things worth not confusing:

Risk capacity: how much risk you can afford given your horizon and income. With 30 years ahead, your capacity is high; 3 years from needing the money, it's low.
Risk tolerance: how much risk you can stomach emotionally without panic selling. A portfolio that's "optimal" on paper is useless if you abandon it in the first 30 % drop.

Your correct allocation is the one that respects the lower of the two.

The rule of thumb (and why it's only a start)

The classic heuristic is to hold an equity percentage equal to 110 (or 120) − your age. At 35, that's 75-85 % in stocks; at 65, 45-55 %. Useful as an anchor, but crude: it ignores your tolerance, your other income sources (a stable public pension acts like a huge "bond") and your real horizon. Use it to orient yourself, not as dogma.

The glide path: how the mix changes over time

The glide path is the trajectory of your allocation over your life. The traditional pattern is declining equity: lots of stock when young, more bonds as retirement approaches. It's what target-date funds do.

But there's an advanced nuance: because of sequence risk, the maximum-danger zone is the years right around retirement. Hence the bond tent and the rising-equity glide path: enter retirement with a more defensive portfolio and, once the critical early years pass, let equities rise again. It defends the fragile moment without giving up the growth you need for 30-40 years of withdrawals.

Rebalancing: sell high, buy low by rule

Over time, weights drift: if stocks rise, your 70/30 becomes 80/20 and you take more risk than you chose. Rebalancing returns the portfolio to its target weights. Two methods:

Calendar-based: review once a year (e.g. in January) and adjust.
Bands (threshold): act only when a class drifts more than, say, ±5 points from its target.

Rebalancing forces you to sell what rose most and buy what fell, exactly the opposite of what fear dictates. It doesn't chase more return: it keeps risk under control.

The Spanish tax advantage: rebalance with transfers

Here Spain works in your favour. If your portfolio is mutual funds, you can rebalance by moving money between them via tax-free transfers: you adjust weights without paying the capital gain. With ETFs or shares, every sale to rebalance is a taxable event. So for a portfolio you'll hold and rebalance for decades, funds are far more tax-friendly.

Extra trick: if you're still contributing, rebalance by directing new contributions to the underweight class. You adjust weights without selling anything.

Common mistakes

Home bias. Loading the portfolio with Spanish or European companies cuts global diversification.
Rebalancing too often. With ETFs/shares, moving the portfolio every month generates costs and taxes that eat the benefit.
Never rebalancing. The portfolio drifts toward more risk in the best moments, right before the drops.
Ignoring the public pension. If you'll have a stable pension, you already own a "bond-like" asset; you can afford somewhat more equity in the portfolio.

What to do

Set an allocation that respects your horizon and your stomach, write it down, and rebalance once a year or on ±5 % bands. Do it with fund transfers or with new contributions to avoid overpaying tax. And plan a glide path that brings you into retirement with a more defensive portfolio in the danger zone.

Educational information, not investment advice. The right allocation depends on your situation; consult a professional if you need to.