What is a suggested balance for a young person's 401k investments?

Question

I'm 22, and I'm just starting my 401k. How should I divide my 401k money? By that I mean what percentage should go in Growth, Bonds, Stable value, etc.?

Answer 1

Depending on your tolerance for risk, put as high a percentage into growth stocks as you can stomach and leave them alone.

You can put 10% in bonds and 10% in a balanced fund, but you have time on your side and the extra yield you will earn on growth stocks will over the long run, well make up for short term losses you might experience over the years.

As you get older you can start moving more money into stable value or balanced funds, but the stock market and gold funds are the only things likely to outpace inflation.

Answer 2

I am in a similar retirement program. Part of what I am concerned with, being considerably older than you, is keeping money, not fully in making money. That means you can afford to take larger risks because you have a longer time to overcome the losing years--and there definitely will be some.

Most good plans start with essentially three areas: guaranteed, debt instruments, and equity instruments. At a place I used to work, we had three choices: annuity (guaranteed), treasury bonds (debt), or the company stock (equity).

At my current place, I have the annuity, Treasury Inflation Protected bonds (commonly called TIPs), government bonds, corporate bonds, mixed bonds, a very good Real Estate Investment Trust (REIT), and then several stocks: general market, global, domestic, aggressive, value, and social conscience (no tobacco or alcoholic beverage producers, and an emphasis on "green" companies and those with social cause trusts and foundations). I have about 30 percent in the company's annuity program--you don't need to do anywhere near that much, yet. I have a sizeable piece of the TIPS, which in previous years gave a phenomenal return. I have a little in regular bonds, the REIT has been exceptionally good (but watch yours, if it is in areas of suspected housing bubble, real estate prices could suffer--mine is well diversified and mostly in things that will not be affected), I have a little in the general stocks, a little more in global stocks (which has performed exceptionally well, but watch for bubbles there too), and I completely avoid the aggressive--the performance here has had wide swings, when it is good, it is almost a rocket ship, but when it is bad, it sinks like a stone, and since I've just got a little over a dozen more years before cashing this stuff in, I couldn't stand too many of those losing years. But you can.

Purposely spread things out and remember your purposes. If you thing the social conscience thing is good, go for it. But if you don't mind having Altria (MO) with its tobacco and high dividends and almost incessent profitability, then don't. If you don't trust the global economy, then don't. If you trust the global but not the domestic economy, then pig out on the share for global stocks. If you think inflation is going to financially burn us in the near future, the splurge on TIPS, but if it is a non-issue to you, then leave them alone. In short decide your purposes for the investment monies and apportion accordingly. You'll do fine.

Oh, one more thing. In my current program, my maximum participation is 4 percent, but if I max out, my employer kicks in 6 percent. A previous place merely matched dollar for dollar up to 5 percent of income. It is free money, so don't pass up anymore of the company's money than you want to part with.

Answer 3

I am not a believer in bond investments for young people. They are not inflation protected. You should however have a balance holding of various segments of the market including a health dose of foreign investments.

Here would be a suggested breakdown to strive for.

25% foreign 10% European 5% Chinese 5% Indian 5% Japan
15% small cap
15% large cap
15% value
15% growth
15% reit

Answer 4

I am 26 and at the following:

60% Micro/Small Cap
20% International
20% Company stock

I am not risk adverse and am up 16% this year. I would agree with the above and sway away from the bond funds for now.