Determining the allocation of your 401(k) account can be tricky, but it is critically important t to anyone who plans on needing the funds in one of these accounts in order to retire. Many 401(k) plans, however, have thousands of investment choices, and knowing the right ones to pick can be hard. Fortunately, there are a couple of general rules that a person can follow in order to determine the right allocations for them.
In general, your 401(k) should contain a mix of stocks, bonds, and cash. While there may be other choices, such as real estate investment funds offered, the vast majority of your 401(k) should be invested in these three options. Ideally, try to pick stock and bond funds that are diverse as possible. That is, these funds should have a wide variety of companies represented among their offerings.
For example, a good stock fund for a 401(k) will have companies from several different industries, such as mining, energy, computers, health care, and manufacturing. While stock funds that concentrate on just one or two industries may see to be performing well, a sudden industry-wide calamity has the potential to wipe out most of the value of your account if you were to invest solely in one of these types of funds.
Figuring out how much of your 401(k) should be invested in stocks is a tricky question. Investing too much in stocks can leave a person in danger of losing too much of their money, but investing too little in stocks will not allow the money in the account to grow. The general rule that most financial advisors use to determine how much of a 401(k) should be invested in the stock market is to subtract the investor’s age from 100. The result is the total percentage of a person’s portfolio that should be invested in stocks. For example, a thirty year old would need to invest about seventy percent of his or her 401(k) in the stock market.
Next, a person has to determine how much money to keep in bonds. In general, subtract your age from the age at which you plan to retire. The result is the amount that should be invested in bonds. A sixty year old who wanted to retire at sixty five would keep forty percent of their money in stocks, five percent in bonds, and the rest in cash.