Understanding 401k Asset Allocation
by Rodney J Rodriguez on Jun 02, 2009 with 0 Comments
Most experts agree that failure to properly allocate assets in a 401k is the number one reason for poor performance.
Intro
The most important decision you will make regarding your retirement assets is how to allocate those assets for maximum gain, while minimizing your losses.
Asset allocation is a strategy used to spread your investment money over several different investment classes to produce maximum returns for a given level of risk. According to at least one major investment firm, asset allocation is one of the most important things you can do to minimize risk.
The goal is to spread your money across different investment classes, such as cash, bonds, and stocks, that don’t move in sync with each other. This way, if one asset does poorly for a period, the other assets will support the portfolio.
Factors to consider
When deciding how you will allocate your assets, you should consider the following factors:
Time: The longer it is until you will need the money, the more investment risk you can tolerate. There will be more time to recover from any losses that may occur.
Risk: You have to look at your own tolerance for risk while keeping in mind the amount of time you have, your retirement goals, and how comfortable you feel taking risks.
Allocation
Though your particular available choices for investments funds will largely depend on where you have your 401k, the general breakdown of how you should allocate your investments are as follows:
20+ years before retirement:
0 percent in cash, 20 percent in bonds and 80 percent in stocks.
10 years before retirement:
0 percent in cash, 40 percent in bonds and 60 percent in stocks.
5 years before retirement:
5 percent in cash, 50 percent in bonds and 45 percent in stocks.
The above is an example of an investment strategy for a “middle of the road” investor. If you are an aggressive investor, put more in stocks, while conservative investors should put more in cash or bonds.
Keep the course
After failing to allocate properly, the next biggest mistake is changing your allocations, especially due to market changes. Remember, investing is a long-term goal, and your allocations should not be changed, except to rebalance so the percentages remain the same, or as you near retirement.
Proper asset allocation can insure maximum gains in your 401k, while minimizing your losses over time.
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Published in: Personal Finance
