My 401((k) asset allocation is too aggressive. I have been reading a few books (e.g., The Intelligent Investor by Benjamin Graham and Wise Investing Made Simple by Larry E. Swedroe), as well as a few investing sites. I am now at a point where I think 100% equity asset allocation for my 401(k) is too risky — even for a 33 years old.
My Current 401(k) Asset Mix
- 20% – Large-cap stocks
- 20% – Mid-cap stocks
- 20% – Small-cap stocks
- 30% – International stocks
- 5% – Global REIT
- 5% – Company stocks
Making Changes
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 company stocks 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.
Here’s my proposed 401(k) allocation:
- 15% – Large-cap stocks
- 15% – Mid-cap stocks
- 20% – Small-cap stocks
- 30% – International stocks
- 10% – Global REIT
- 10% – Bonds
| Before | After |
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I have been trying to optimize my asset allocation for maximum return and minimum risk and found some find free online tools that could help: Personal Capital and Morningstar’s Portfolio X-Ray Tool.
I would love to hear feedback from my readers about this new asset allocation mix.
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Pinyo Bhulipongsanon is the owner of Moolanomy Personal Finance and a Realtor® licensed in Virginia and Maryland. Over the past 20 years, Pinyo has enjoyed a diverse career as an investor, entrepreneur, business executive, educator, financial literacy author, and Realtor®.
How are you ensuring that the funds you pick actually match your investment portfolio?
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? 🙂
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!
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.
@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… Read more »
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.
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!
“For the 23 year period 1966-88, the U.S. large-cap growth stocks underperformed totally riskless one-month bank certificates of deposit.” 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. 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… Read more »
@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 —… Read more »
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.
How’d all that work out for you?
@OSR – So far so good. But I did add more to my international equities and bonds allocation since I wrote this.
It is best to have equal amounts in percentage because you never know which fund will do better. There is no need for bonds funds because they provide little value.
Stick with 25% in Large Cap, Small Cap, Medium Cap and International.
Go with money market 100% when the stock market is at a one year low.
Our 401K and IRA are with Citigroup/Morgan Stanley and we want to move the funds to a source that we can actually trust. Put everything in C.D.s because of the tremendouse loss, now want to get back in the market but not with this company. I am a total layman could use some advice. Thanks.
Red,
The market has done well in the past 12 months so what did Citi and Morgan do?
I don’t need you to give me personal information but at least give me something I can work with to help you.
The market now as of 4/29/11 is at high which means it is soon bound for a downward period.
I can give you information slowly at a time to help you. I have been doing this since 2000 and have seen how it works.
Hello, I am curious to your 401K allocation now and how do you feel about changing your 401k 6 years ago. I am going thru the same stage now as to how to allocate my 401K. I am 33 and wanting to use a 70/30 mix. Any advice you can provide considering you experience the same challenge 6 years ago.
Thank you for sharing. I recently change my AA to 80/20 for each of the accounts. I have 5 (IRA, 2 Roth IRA, and 2 401k)
I made 4 portfolios:
1. IRA – Vanguard Target Fund
2. Roth – Vangaurd Target Fund
3. Roth – Vanguard Target Fund
4 Both 401K mirrow the Vanguard Target Fund.
I know many would say combined all accounts into one big portfilo but for me its just easier this way.
How did you decided your 85/15 mix?
Thanks