From
Your Perspective:
Managing your 401(k) portfolio
Allocating your
401(k)
The first step in managing an investment portfolio,
inside or outside a
401(k),
is choosing an
asset allocation.
In your 401(k), you decide what
percentage of your investment principal will go into
equities,
what percentage into
bonds
and other fixed-income investments, and what percentage into cash
and
cash
equivalents.
Outside of your 401(k), you may also consider
other asset classes, including real estate, that aren’t
usually offered in an employer-sponsored plan.
You don’t have to create an asset allocation
on your own. There are standard models you can adapt, and some
general practices that may offer helpful guidance.
For example, say you’re in your early 30s. The rule of thumb
is that you should invest 70% or more of your portfolio in stock
or stock mutual funds. But if the prospect of a
bear
market
— a sustained downturn in the value of stocks
— makes you uneasy, or if you own equities in other accounts,
you may decide to limit your stock allocation to 50% or 60%
of your account.
On the other hand, if you’re in your 60s,
conventional wisdom says you should have 40% or less of your account
invested in stock. But if Social Security, your pension benefits,
and the part-time work you’re planning to do will cover
most of your expenses right after retirement, you may want to
be more aggressive with your 401(k) money. So, you might invest
a larger portion — perhaps 60% or more — in stocks,
with the thought that you can always reallocate later. It all
depends on your goals and your tolerance for risk.
How
much of your portfolio should you invest in stock
and stock mutual funds? By one rule of thumb, you
should subtract your age from 100 if you’re
a man, and 107 if you’re a woman. (The difference
accounts for the fact that women, on average, live
seven years longer than men.) The number that’s
left over is approximately the percentage some
experts believe you should invest in stock. For
instance, by this rule, a 45-year-old woman should
have about 62% of her portfolio invested in stock.
Depending on your circumstances and your risk tolerance,
you may decide to allocate more or less to stock
and stock
mutual
funds
in your retirement plan.
