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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
Your asset allocation is the percentage of your money that you want to invest in each particular asset category. For example, you might want to allocate 70% of your portfolio to stock investments, 20% to bond investments, and 10% to "cash" investments, such as a money-market fund.
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.
The 120-age investment rule states that a healthy investing approach means subtracting your age from 120 and using the result as the percentage of your investment dollars in stocks and other equity investments.
What is the allocation mix by age for 401k? ›
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 percentage of 401k should be large cap? ›
To find an appropriate investment mix for your time horizon, find your age and the corresponding portfolio allocation. A typical mixture could include 60% large-cap (established companies), 20% mid-cap/small-cap (small to medium-sized compa- nies), and 20% international (companies outside the U.S.) stocks.
What is a good 401k portfolio mix? ›
A balanced fund allocates your 401(k) contributions across both stocks and bonds, usually in a proportion of about 60% stocks and 40% bonds. The fund is said to be "balanced" because the more conservative bonds minimize the risk of the 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 5 asset rule? ›
The 5% rule says as an investor, you should not invest more than 5% of your total portfolio in any one option alone. This simple technique will ensure you have a balanced portfolio.
What is the proper asset allocation by age? ›
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 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. Currently, most investment professionals include real estate, commodities, futures, other financial derivatives, and even cryptocurrencies in the asset class mix.
For example:
- You can consider investing heavily in stocks if you're younger than 50 and saving for retirement. ...
- As you reach your 50s, consider allocating 60% of your portfolio to stocks and 40% to bonds. ...
- Once you're retired, you may prefer a more conservative allocation of 50% in stocks and 50% in bonds.
However, the general rule of thumb, according to Fidelity Investments, is that you should aim to save at least the equivalent of your salary by age 30, three times your salary by age 40, six times by age 50, eight times by 60 and 10 times by 67.
How big should my 401k be at 50? ›
By age 40, you should have three times your annual salary already saved. By age 50, you should have six times your salary in an account.
Is 20% to 401k too much? ›
As a rule of thumb, experts advise that you save between 10% and 20% of your gross salary toward retirement. That could be in a 401(k) or in another kind of retirement account. No matter where you save it, you want to save as much for retirement as you can while still living comfortably.
What is the best asset mix for 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).
Is contributing 25% to 401k too much? ›
Most financial planning studies suggest that the ideal contribution percentage to save for retirement is between 15% and 20% of gross income. These contributions could be made into a 401(k) plan, 401(k) match received from an employer, IRA, Roth IRA, or taxable accounts.
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.
What is the best asset allocation ratio? ›
Many financial advisors recommend a 60/40 asset allocation between stocks and fixed income to take advantage of growth while keeping up your defenses.
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.
