Asset allocation for 401(k)

**jIM_Ohio** · 10-09-2010, 06:35 AM

Asset allocation is about owning different assets which behave differently under the same conditions.

If the 2 growth funds own the same stocks, they will behave the same all the time, with only difference being the expense ratio and manager decision making. I would not own 2 different growth funds which owned the same stocks. That is redundant.

I would own one growth and one value fund (only) if both funds owned small and mid and large companies. If one fund is a mid cap value fund and the other is a small cap growth fund, there are 4-7 other funds you need (large growth, large value, mid growth, small value and maybe large blend, mid blend and small blend).

I also would NOT own a target fund and the others- if you own a target fund, just choose that one fund, and that fund will own many other funds (read its prospectus). One target fund will own domestic and foreign, stocks and bonds, large companies and small. It is instant diversification with just one decision (choose your retirement year).

So the way to figure this out is decide what types of companies you want to own. Then how much of each. Each type of company has different characteristics for how it profits at different parts of the market cycle.

For example
Know how much risk you want to take, then decide on % stocks and % bonds which define this risk. For example might be 100% stocks or 80% stocks and 20% bonds. Most investing web sites have questionnaires which help you get this information.

Once you know % stocks -% bonds, decide what types of stocks and bonds you want to own.

Large cap stocks
Mid Cap stocks
Small Cap stocks
Foreign large stocks
Foreign small stocks
Emerging markets stocks
US government bonds
Corporate bonds
Junk bonds
Foreign bonds

Also decide % domestic vs % foreign you want to own. Decide this before looking at any mutual fund.

The break that down into percentages (do not look at mutual funds yet)

If you chose 80% stocks and 20% bonds you might decide that list above is this

40% Large cap stocks
Mid Cap stocks
20% Small Cap stocks
15% Foreign large stocks
Foreign small stocks
5% Emerging markets stocks
10% US government bonds
10% Corporate bonds
Junk bonds
Foreign bonds

note that is 80% equity and 20% bonds
it is also 80% domestic and 20% foreign

If you chose 40% stocks and 60% bonds you choose differently

15% Large cap stocks
Mid Cap stocks
5% Small Cap stocks
20% Foreign large stocks
Foreign small stocks
Emerging markets stocks
20% US government bonds
10% Corporate bonds
10% Junk bonds
20% Foreign bonds

That is 40% stocks and 60% bonds
it is also 60% domestic and 40% foreign

Once you do the above, then pick one fund and allocate that portion of allocation to it (meaning if value fund is really a large cap fund, then you put the entire large cap allocation to that one fund).

**elessar78** · 10-13-2010, 05:09 AM

I did more research, still ongoing, after I posted that and realized that I have so many holes in my investing knowledge. For the time being I broke up that value fund and split it 70/30 between an SP500 index fund and the Europe/Pacific Index fund.

This question also pushed me to look at all my retirement accounts. I've had 3 jobs in the past 8 years and I've never bothered to consolidate my retirement accounts, so I have a Trad IRA, ROTH IRA, an old 403(b) and my current 401(k). Should I consolidate these? It would make it much easier to manage.

So overall, in all my accounts I'm at 82% stock and 18% bonds.

Stocks are 50/50 between SP500 Index and Europe/Pacific/Emerging Markets Funds with a very small bit in REITs. The bonds are split 50/50 between Inflation Protected Securities and a general bond market account. I requested prospectuses for all these funds to see where they are investing.

What do you find is a tolerable level of expense ratios? My highest one is a .86% and lowest is .09%. I'm somewhat limited because of what my work plan offers and I'm considering of stopping my 401(k) contributions because they recently stopped the matching and I don't believe that it will ever resume.

**jIM_Ohio** · 10-13-2010, 05:43 AM

The match on a 401k is a bonus, for most workers getting a tax deduction up front is considerable value both now and in retirement (first 400k+ coming out of a 401k is tax free over a 30 year period- so tax free now and tax free in retirement is a good deal).

70-30 domestic-foreign split is good
80-20 stocks-bonds is good

If those allocations sound good to you, then either make sure each account is invested the same way, or consolidate them.

One issue you will find is that with small balances in a Roth (you are limited to 5k per year to the Roth IRA), it will be tough in 200k portfolio for that 5k to "hold" a whole allocation to something.

You did very well checking on your accounts and answering your own questions. If you have more questions, keep asking.

Asset allocation for 401(k)