Changing My 401k Asset Allocation

My 401k allocation is too aggressive. I have been reading a few books (e.g., The Intelligent Investor by Benjamin Graham, Wise Investing Made Simple by Larry E. Swedroe), and many web sites. I am now at a point where I think 100% equity asset allocation for my 401k is too risky — even for a 33 years old.

Here’s my current 401k asset mix:

Asset Allocation Before

20% – Large-cap stocks
20% – Mid-cap stocks
20% – Small-cap stocks
30% – International stocks
5% – Global REIT
5% – Company stocks

I am thinking about changing my allocations as follow:

Eliminate my company stocks position. Although I love my company and strongly believe it will perform well, owning a company stock does not improve the diversification or reduce the risk of my portfolio. I think owning it for the familiarity and sentimental value is a bad long-term decision.
Add 10% of bond index fund to my portfolio, and increase Global REIT to 10%. Based on what I’ve read, the key to successful asset allocation is having investments that have low (or negative) correlation to one another. Making this change will certainly reduce the overall asset correlation; and further diversify the portfolio.
Other reductions. Since I am removing 5% and adding 15%, I have to come up with 10% from somewhere. The two places I decided to make sacrifice are large-capitalization stocks and mid-capitalization stocks.

Asset Allocation After

Here’s my proposed 401k allocation:

15% – Large-cap stocks
15% – Mid-cap stocks
20% – Small-cap stocks
30% – International stocks
10% – Global REIT
10% – Bonds

I have been trying to find a free online tool that optimize my asset allocation for maximum return and minimum risk — but no such luck so far.

I would love to hear feedback from my readers about this new asset allocation mix.

This article was featured in the Carnival of Everything Finance #5 hosted by Everything Finance.

12 Comments

plonkee
October 10, 2007, 12:42

How are you ensuring that the funds you pick actually match your investment portfolio?
hank
October 10, 2007, 15:29

Eh, don’t worry about it – you still have many years to go! Stocks over the past 80 years have proven you’re going to be alright, eh?
DR
October 10, 2007, 16:47

I think your new allocation, over all, is pretty good. I personally agree with adding 10% bonds even at 33. At 40, I have 20% in cash and bonds. Some questions I would ask about the asset allocation would include: (1) why own mid-cap stocks at all; (2) do your international investments include emerging markets, and if so, how much (if not, why not); (3) how much of your global REIT is in U.S. REITs; (4) do you favor growth, value or a blend in your equity investments? Good luck!
Mrs. Micah
October 10, 2007, 17:43

I think 10% bonds is a wise decision. And you’re totally right to get out of your company’s stock. Even if you worked for Google it wouldn’t be a good idea. Your income is already tied up in them…no point in furthering the crisis if they suddenly implode.
The other balancing bits look good too, but I think getting into bonds and out of your company were the wisest moves.
Pinyo
October 10, 2007, 18:15

@plonkee – this is my 401k so the choices are limited. The funds are aptly named large-cap, mid-cap, small-cap, etc.
If this is outside of my 401k, you can find capitalization and other information in the fund profile — i.e., VFINX
@hank – that was how I think too, but after reading these books and sites, 100% equity seems very risky now. For example (from Swedroe’s book):
“For the 23 year period 1966-88, the U.S. large-cap growth stocks…underperformed totally riskless one-month bank certificates of deposit.”
and
“[As of January 2007] the Nikkei Index was still down almost 60% from the 40,000 level it had hit in 1989).”
@DR – great questions!
* Mid-cap, because they are there. I know it’s not a very good reason, but I like to spread out my investment among many funds (at least in my 401k)
* International has 7% in Latin America, Eastern Europe, South Africa, and Asia Emerging Markets.
* Global REIT, no idea. The fund information is very limited. Very good question though.
* I am more comfortable with value investment – e.g., low P/E with chance of turnaround. But now, I am trying to go with low expense index funds.
@Mrs. Micah – Aside from other decisions, I agree that selling company stocks and adding bond is the best move.
kev
October 10, 2007, 22:31

That’s pretty much dead on with my asset mix for my 401k plan (except my plan does not offer REITs). I have 10% in bonds/cash and 25% in international/emerging markets. I’m a few years younger than you, but I still prefer the 90/10 stocks-bonds ratio. It suits me.
Dave
October 11, 2007, 0:48

Morningstar has a great feature. Give them your portfolio & x-ray it to see what you have. It has an asset allocation tool too. You also need to examine your international holding (are they international large cap, small cap, emerging market, etc.) Some of the morningstar features are for paying members but you can try a two week free trial. Good luck re-balancing!
Jon
October 12, 2007, 7:27

Ã¢â‚¬Å“For the 23 year period 1966-88, the U.S. large-cap growth stocksÃ¢â‚¬Â¦underperformed totally riskless one-month bank certificates of deposit.Ã¢â‚¬Â
Keep in mind that quotes like these generally assume that you invested $X in 1966, let it sit there, and then took it out in 1988. That just doesn’t happen in reality. If you make regular, yearly contributions, you’d have to look at 1966-1988, 1967-1988, 1968-1988, etc. This chart will show you that from 1974-1988, the return was like 300%!
That said, in any account where you can’t add and remove money freely and there is a yearly cap on contributions(like a 401k or Roth IRA), it’s critical to have some portion in bonds or cash.
The reason is simple.. when the market crashes (it always does eventually), you’re *supposed* to buy buy buy. Doesn’t everybody dream of going back in time and investing $100 or so during the Great Depression? Well, it’s nice to have 20% of your holdings in bonds or a money market so that when stocks fall a lot, you can sell some bonds and quickly buy stocks while they’re low.
After all, the most important aspect of asset allocation is asset RE-allocation! That’s where most of the benefit come from.
Pinyo
October 12, 2007, 7:56

@kev – thanks for sharing, good to know I am not alone.
@Dave – thanks for pointing out the Morningstar tool. I am not sure if this is even possible since none of my 401k funds are public and has no ticker symbol. The only information is what little they provided my 401k site.
@Jon – good caution about generalization and assumptions — I should be more careful. I did go back and it seems CAGR for the S&P 500 between 1966 (89.23) and 1988 (258.89) is about 5%; assuming dividends add another 3% and that’s about 8% total — not too bad. However, the author point was that you could achieved a better result risk-free using CDs.
Great points about having money to buy low and the whole trick is the rebalancing portion (”Re-allocation”).
Steve
February 16, 2008, 7:26

Pinyo – good article. You should be able to find the funds you are investing in through Morningstar. What are the names of the funds? Type them into Google and it should point you to the Morningstar page for that fund. That’s what I did.
OSR
March 28, 2009, 23:15

How’d all that work out for you?
Pinyo
March 30, 2009, 8:50

@OSR – So far so good. But I did add more to my international equities and bonds allocation since I wrote this.