401K fund allocation?

Question

Im 25 and looking were to put my money for my 401K. This is the Aggressive Portfolio.....Is this good for someone young with 35+ years to wait it out? I was thinking 50% in this portfolio and 50% in a Moderate Aggressive

Galliard Capital Management Managed Income 0%

Mellon EB Daily Liquidity Aggregate Bond Index 0%

Vanguard Inflation-Protected Securities 0%

Vanguard Windsor II Adm 12%

Mellon EB Daily Liquidity Stock Index 23%

Harbor Capital Appreciation Instl 12%

Mellon EB Daily Liquidity Mid Cap Index 13%

American Beacon Small Cap Value Instl 2%

William Blair Small Cap Growth I 1%

Dodge & Cox International Stock 12%

Mellon EB Daily Liquidity Internat ional Stock 12%

Lazard Emerging Markets Instl 5%

Vangu ard REIT Index 8%

Cash 0%

Bonds 0%

Stocks 100%

Answer 1

The biggest thing that will impact your 401k portfolio over the years is the risk in the marketplace. Virtually all asset allocation models expect you to be 100% invested all the time based upon your risk tolerance. This is one of the biggest mistakes you can make and it will affect you much more than expense ratios.

I would strongly urge you to consider adding one other "filter" in determining your asset allocation. We just published an article on our new website, InvestmentCoaching.net, that speaks directly to this. Here is an excerpt from the article:

"The gurus of the investment world are always advising us to watch out for those "expense ratios" of the funds we invest in. They tell us that if those ratios are too high, over your investing life, they will slowly drain your portfolio. I like to picture them as little bugs that crawl underneath the front door of your home. We are always spraying them with bug spray to keep them at bay. "Shut the door you're letting in all those little critters". I don't like those little critters either. But you know what? Yeah, there is more to this story. While you were at the front door spraying those bugs - BAM! - the Big Bad Bear of 2000 to 2003 - tore off your back door, ripped apart your kitchen, smashed down doors and took 40% of everything you owned...and those gurus had you spraying for bugs!"

You may be too young to remember the 2000 Bear Market (you were only 17). But, guess what, the Big Bad Bear is Back! If you want to learn more about this, the entire article is available in our free Investment Strategy Guide (registration required).

The other factor that your "static" asset allocations overlook is momentum, which is dynamic. For example, in your list you show Vanguard Windsor II, which is a Large Cap Value fund. Right now, that asset class is at the bottom of our equity fund list and I would not invest in it at all right now. The strongest is Mid Cap Growth. This changes over time and it is extremely important to take these two factors into consideration. If you want to learn more, take a look at some of the other articles on our site at InvestmentCoaching.net.

I wish you all the best and you are to be commended for even taking the time to consider these issues. That in and of itself puts you way ahead of the rest of the pack. Take care.

Answer 2

The only real way to control risk is with time and diversification. You are young; this is your retirement fund. Do NOT plan on touching it until you are at least 59 1/2 and you will be amazed how much you will accumulate by staying the course with an aggressive -but diversified - portfolio until you are 40. The reason there are so many choices is because people have different needs and goals. However, age more than anything dictates allocations for retirement. Not market conditions. With that said, remember diversify your assets. Don't focus on recent past performance. You need international as well as domestic; you need small cap, mid cap and large cap stocks. What you don't need are bonds or money market/cash accounts within this 401(k). You should have a solid weighting in U.S. based large cap stocks, and then build up your risk from there. Then again, how much are we really talking about at this point? Protecting wealth is a mute point. You need to build it first....and that takes time and discipline. As you get closer to retirement, focus on a moderate to conservative risk allocationl. Regardless, "aggressive" is not like win/lose or putting it all on black. These are mutual funds which are professionally managed and highly diversified. It's very unlikely you will lose your money with funds. Instead, an aggressive allocation just means you have to tolerate and accept more volatility, more periods of declines and be much more patient. However, it will pay off over 5, 10 and 15 years. Good luck!

Answer 3

At 25, I'd go all aggressive -- time is on your side.

Since you have many years of investing, pay more intention to the expense ratio of a fund. If it charges 0.5%/year, in 20 years, what percentage goes to the fund management?

Therefore, I'd go with the least expensive and some emerging

Vanguard Windsor II Adm 80%

Vanguard REIT Index 10%

Lazard Emerging Markets Instl 10%