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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 is the 120 rule for asset allocation? ›
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? ›
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 is a 70 30 investment strategy? ›
A 70/30 portfolio is an investment portfolio where 70% of investment capital is allocated to stocks and 30% to fixed-income securities, primarily bonds.
How much money do I need to invest to make $3,000 a month? ›
Imagine you wish to amass $3000 monthly from your investments, amounting to $36,000 annually. If you park your funds in a savings account offering a 2% annual interest rate, you'd need to inject roughly $1.8 million into the account.
What is the golden rule of asset allocation? ›
This principle recommends investing the result of subtracting your age from 100 in equities, with the remaining portion allocated to debt instruments. For example, a 35-year-old would allocate 65 per cent to equities and 35 per cent to debt based on this rule.
What is the 50 30 20 rule for allocating resources? ›
The 50-30-20 rule recommends putting 50% of your money toward needs, 30% toward wants, and 20% toward savings. The savings category also includes money you will need to realize your future goals.
What is the best 401k allocation strategy? ›
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.
Some financial advisors recommend a mix of 60% stocks, 35% fixed income, and 5% cash when an investor is in their 60s. So, at age 55, and if you're still working and investing, you might consider that allocation or something with even more growth potential.
What is the best asset allocation strategy? ›
100% Asset Allocation
Another option for the best asset allocation is to use the 100% rule and build a portfolio that's either all stocks or all bonds. This rule gives you two extremes to choose from: High risk/high returns or low risk/low returns.
The 4-3-2-1 Approach
One simple rule of thumb I tend to adopt is going by the 4-3-2-1 ratios to budgeting. This ratio allocates 40% of your income towards expenses, 30% towards housing, 20% towards savings and investments and 10% towards insurance.
What is the 10 5 3 rule of investment? ›
According to this rule, stocks can potentially return 10% annually, bonds 5%, and cash 3%. While these figures are not guarantees, they serve as a guideline for investors to forecast potential returns and adjust their portfolio accordingly.
What is the 80% rule investing? ›
In investing, the 80-20 rule generally holds that 20% of the holdings in a portfolio are responsible for 80% of the portfolio's growth. On the flip side, 20% of a portfolio's holdings could be responsible for 80% of its losses.
How to invest 100k to make $1 million in 10 years? ›
The simplest path from $100,000 to $1 million
The simplest way to invest your money is by using a simple broad-market index fund. An index fund that tracks the S&P 500 or a total stock market index typically has low fees, and it's going to closely match what the overall stock market returns.
Can I live off interest on a million dollars? ›
Once you have $1 million in assets, you can look seriously at living entirely off the returns of a portfolio. After all, the S&P 500 alone averages 10% returns per year. Setting aside taxes and down-year investment portfolio management, a $1 million index fund could provide $100,000 annually.
What salary brings home $3,000 a month? ›
Annual / Monthly / Weekly / Hourly Converter
If you make $3,000 per month, your Yearly salary would be $36,000.
What is the 120% rule? ›
120% Rule: For back-fed sources like solar, the NEC allows for the sum of the main breaker and the solar back-fed breaker to be up to 120% of the panel's busbar rating. This accounts for the idea that the main breaker and the solar source are unlikely to be delivering their full current simultaneously.
What is the rule of 120 in finance? ›
The Rule of 120 (previously known as the Rule of 100) says that subtracting your age from 120 will give you an idea of the weight percentage for equities in your portfolio.
What does 120 shares mean? ›
There's also the 120 rule. For that, you subtract your age from 120, and the result is the suggested percentage of your stock weighting. For example, if you're 30, the rule would have you put 90% of your portfolio in stocks. If you're 60, the stock weighting would be 60%. The rest would go into bonds.
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.
