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Asset Allocation Made Simple As you accumulate retirement assets, the most important decision you need to make is how the assets are going to be invested. The allotting of your retirement assets across stocks, bonds, money market, and other investments is referred to as asset allocation. Your asset allocation decision, more than most other decisions, will determines how fast your retirement account will grow. Is it difficult to do? Not really, but like most investment issues you do need to know some basics. - Invest for the Long-term: Once you set your allocation, be patient. Discipline yourself to maintain your allocation through down markets as well as up markets.
- Invest for Growth: Equity mutual funds (stocks) need to be an important part of your allocation, even in retirement. Don't worry about short-term ups and downs in the stock market. Over time, stocks have usually outperformed all other types of investments while staying ahead of inflation. Make equity mutual funds the core of a long-term investing strategy.
- Know Yourself: Understand your tolerance for risk. Ask yourself, "Can I sleep at night with my retirement dollars allocated this way?" If the answer is no, make a change. Don't create undue emotional stress.
- Diversified Your Portfolio: This is what good asset allocation is all about. Don't put all your assets into one asset class. Spread them among different asset classes and investment styles. Doing so will spread your assets over an assortment of investments and should reduce your risk. You can learn more about asset styles by clicking here.
- Review Annually: Take the time once a year to review your life circ*mstances and long-term goals. Based upon the results of your review, adjust your allocation. Even if nothing has changed, you may need to rebalance your portfolio to bring it back into line with your allocation objectives.
- Fees and Costs: Like everything, mutual funds and other 401k investment options carry costs, and they can vary greatly from fund-to-fund. Since high fund costs can impact your long-term investment earnings, you need to know what the fees are -- so ask.
You must make your own allocation decisions based upon your individual situation, but we can give you some general "rule of thumb" asset allocations based upon age. You can use these as a starting point. We assume retirement at age 65. - Age: Less Than 40 -- 100% in equities. Of this, 40% invested in large cap. growth funds, 25% small cap. growth funds, 25% in large cap. value funds, and 10% international. Another option is to use several good index funds.
- Age: 40 to 50 -- 80% in equities and 20% in fixed income. Of the equity portion, 40% invested in large cap. growth funds, 25% small cap. growth funds, 25% in large cap. value funds, and 10% international. Another good option for your equity portion is to use good index funds.
- Age: 51 to 55 -- 70% in equities and 30% in fixed income. Of the equity portion, 40% invested in large cap. growth funds, 25% small cap. growth funds, 25% in large cap. value funds, and 10% international. Another good option for your equity portion is to use good index funds.
- Age: 56 to 60 -- 50% in equities and 50% in fixed income. Of the equity portion, 40% invested in large cap. growth funds, 10% small cap. growth funds, 40% in large cap. value funds, and 10% international. Another good option for your equity portion is to use good index funds.
- Age: 61 to 65 -- Reduce equities by 5% per year and increase fixed income by 5% per year so that at retirement you have 25% in equities and 75% in fixed income. Of the equity portion, 40% invested in large cap. growth funds, 10% small cap. growth funds, 40% in large cap. value funds, and 10% international. Another good option for your equity portion is to use good index funds.
Target-Date Funds As you may have learned, trying to make well-informed asset allocation decisions is not easy. One investment alternative that has surged in popularity over the past years is called a target-date fund. With this type of fund, the fund manager will make the asset allocation decisions for you according to the amount of years you have until retirement. They automatically rebalance the fund to become more conservative as you gets closer to retirement. It's like putting your 401k account on autopilot. Most 401k plans today offer target-date funds, so check with your plan administrator to see what is available to you. Additional Reading The Value of Asset Allocation, Boost Your 401k Returns by Rebalancing, and Nurture Your 401k Portfolio Using Asset Allocation. This is for educational purposes only. The information provided here is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. Consult your financial, tax or legal advisor regarding your own unique situation and your company's benefits representative for rules specific to your plan. | FAQs
With a 401(k), an employee sets a percentage of their income to be automatically taken out of each paycheck and invested in their account. Participants can choose how to allocate their funds among the investment choices offered by the plan, which usually include a variety of mutual funds.
What should my 401k asset allocation be? ›
401(k) Portfolio Allocations by Risk Profile
- An aggressive allocation: 90% stocks, 10% bonds.
- A moderately aggressive allocation: 70% stocks, 30% bonds.
- A balanced allocation: 50% stocks, 50% bonds.
- A conservative allocation: 30% stocks, 80% bonds.
With a 401(k), an employee sets a percentage of their income to be automatically taken out of each paycheck and invested in their account. Participants can choose how to allocate their funds among the investment choices offered by the plan, which usually include a variety of mutual funds.
What is the 120 rule for asset allocation? ›
The common rule of asset allocation by age is that you should hold a percentage of stocks that is equal to 100 minus your age. So if you're 40, you should hold 60% of your portfolio in stocks. Since life expectancy is growing, changing that rule to 110 minus your age or 120 minus your age may be more appropriate.
What three 3 ways should you allocate your assets in retirement? ›
While the actual allocation to each asset will be personal to you, generally, an aggressive investment mix is mostly stocks and some bonds, a more moderate mix balances stocks and bonds and adds in some cash, and a conservative mix is mostly cash and bonds with only some stocks.
What is the 4 rule for asset allocation? ›
One frequently used rule of thumb for retirement spending is known as the 4% rule. It's relatively simple: You add up all of your investments, and withdraw 4% of that total during your first year of retirement.
What is the ideal 401k allocation by age? ›
The Rule of 100 determines the percentage of stocks you should hold by subtracting your age from 100. If you are 60, for example, the Rule of 100 advises holding 40% of your portfolio in stocks. The Rule of 110 evolved from the Rule of 100 because people are generally living longer.
How to invest in my 401k for dummies? ›
401(k) investment strategies
- Come up with a plan. ...
- Establish realistic expectations, and then pick funds that have the potential to meet your goals. ...
- Remember that a higher risk doesn't guarantee a higher return.
- Avoid funds that have dramatic up-and-down swings, particularly if you're nearing retirement.
The Bottom Line. "The ideal contribution rate for retirement depends on a few different factors," says Mark Hebner of Index Fund Advisors in Irvine, Calif., "but a good sweet spot is 10% to 15%—more towards 15% if you can afford to do so. The bare minimum is 10%."
How do you use 401k effectively? ›
Key Takeaways
Before choosing, consider your risk tolerance, age, and the amount you'll need to retire. Avoid funds with high fees. Be sure to diversify your investments to mitigate risk, although many funds are already diversified. At a minimum, contribute enough to maximize your employer's match.
You may end up losing your wealth or even your capital. To avoid such a risk, follow this mantra, of devote no more than 5 per cent of their portfolio to any one investment asset. This concept is also known as the "investment allocation rule."
What is a reasonable asset allocation? ›
A good asset allocation varies by individual and can depend on various factors, including age, financial targets, and appetite for risk. Historically, an asset allocation of 60% stocks and 40% bonds was considered optimal.
What are the three common assets considered in asset allocation? ›
Historically, the three main asset classes have been equities (stocks), fixed income (bonds), and cash equivalent or money market instruments.
What is a good asset allocation by age? ›
Stock allocations by age
Investors in their 20s, 30s and 40s all maintain about a 41% allocation of U.S. stocks and 9% allocation of international stocks in their financial portfolios. Investors in their 50s and 60s keep between 35% and 39% of their portfolio assets in U.S. stocks and about 8% in international stocks.
What is the best asset mix in retirement? ›
At age 60–69, consider a moderate portfolio (60% stock, 35% bonds, 5% cash/cash investments); 70–79, moderately conservative (40% stock, 50% bonds, 10% cash/cash investments); 80 and above, conservative (20% stock, 50% bonds, 30% cash/cash investments).
How should I split my 401k investment? ›
The moderately conservative allocation is 25% large-cap stocks, 5% small-cap stocks, 10% international stocks, 50% bonds and 10% cash investments.
What is the 12 20 80 asset allocation rule? ›
Set aside 12 months of your expenses in liquid fund to take care of emergencies. Invest 20% of your investable surplus into gold, that generally has an inverse correlation with equity. Allocate the balance 80% of your investable surplus in a diversified equity portfolio.
How aggressive should my 401k be at $50? ›
Now, most financial advisors recommend that you have between five and six times your annual income in a 401(k) account or other retirement savings account by age 50. With continued growth over the rest of your working career, this amount should generally let you have enough in savings to retire comfortably by age 65.
What asset allocation is recommended? ›
Your asset allocation should be aligned with your financial goals, the time frame in which you want to accomplish those goals, and your risk tolerance. Taking these 3 factors into account will give you the best chance of having the amount of money you need when you need it.
Is 70 30 a good asset allocation? ›
The 30% exposure to bonds buffers the risk of 70% equity exposure to some extent, besides providing stable returns. While asset allocation is generally governed by various factors including demographics and economics, the 70/30 rule may serve as a good starting point for most investors.
