Proper Asset Allocation in your 401k

proper asset allocation in your 401k

Proper Asset Allocation in your 401k

Whenever the investment community talks about investing, at some point the topic of proper asset allocation will come up. They start talking about small cap, large cap, international, commodities, bonds, etc. They talk about giving you a free check up to see if you have proper allocation, tell you several of your funds are overlapping and your not a diversified as you should be. Then they try to sell you some of their services.

Fees will drastically hurt you

What they don’t talk about is how damaging fees are to your 401k plan over time. We will get back to the allocation a little later. Ever look at your 401k when the market was on a pretty good roll, and ask yourself why my funds are not keeping pace with the market? Fees, Hidden Fees, Buried Fees. Depending on how much you earn and save, fees of 1-3% will reduce your retirement account over a 30 year period between 100k-500k or more.

See more on how fees erode you retirement fund in a money US news report.

Did you know that 96% of mutual funds fail to out perform S&P index funds? This is the main goal of all mutual funds that is to beat the S&P index (the gold standard). So why not just invest in the S&P index fund?

So what is the solution? Typical 401k plans usually have a several mutual funds of different classes, one fund that is a money market account and pays the going interest rate, and a target retirement fund (i.e. mixture of bonds and stocks) and an index fund, typically a S&P index fund.

What to invest in

Invest in 3 categories a target fund (invests in bonds and stocks), the cash account (low risk) and the index fund (outperforms 96% of mutual funds). These three funds will have the lowest fees. Index funds will charge 0.12 to 0.25% typically. That is about 12 to 25 cents per hundred dollars per year. See what John Boogle has to say about fees. The exact percent allocation will depend on your age and financial goals. Check with your financial advisor as to the exact allocations that is right for you.

Tell Wall Street your Mad as Hell

Lets start a new movement called Vacate Wall Street. Start investing in low fee index funds and stop investing in under performing high fee mutual funds.