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**Reincarnate** · 02-25-2015, 07:52 PM

Asset allocation:

Okay, so how should you arrange your 401k / IRA / your portfolio in general? This is where things become highly personalized, as they depend a lot on your tolerance for risk, your age, your goals, etc.

Your portfolio should probably be a mix of diversified stocks and bonds. Stocks are riskier investments that can move around a lot, whereas bonds are more stable / less risky, but don't offer as great a return as stocks do. The general idea is that when you're young, you can afford to invest more of your portfolio in equities / stocks because you have a lot of time to absorb negative downswings / build wealth, whereas if you're older, you may want more bonds in your portfolio to stabilize things and prevent you from losing too much in a downswing as you're nearing retirement age.

You'll find all sorts of heuristics out there, but a simple one is this:

1/3 allocated to the total US stock market
1/3 allocated to the international stock market
1/3 allocated to the total bond market

If you're using Vanguard, for example, this might mean using the index funds VTSMX, VGTSX, and VBMFX.

And then every year or so, you "rebalance" your portfolio by adjusting your allocation percentages so that everything goes back into 1/3 1/3 1/3 ratio (some pieces will outperform others, so rebalancing means you are in effect buying low and selling high without market timing, and calibrating everything back to your desired risk profile). If you invest in something like a Target Retirement account, this is all handled for you.

It's also important that your funds be low-cost. This is built into something called the "expense ratio" (which is listed explicitly). If you need a guide:

<=0.10%: Fantastic
0.11% - 0.25%: Perfectly fine
0.26% - 0.30%: Probably OK, but maybe look for alternatives, if possible.
0.31% - 0.50%: Ehhhhhhhhhhhhhhh...
Over 0.50%: Forget it, unless it's something really good. Most likely too expensive, though.

If your funds aren't low-cost, they will really eat at your gains over the long run.

02-25-2015, 07:52 PM	#4
Reincarnate x'); DROP TABLE FFR;-- Join Date: Nov 2010 Posts: 6,332	Re: Basic personal finance walkthrough Asset allocation: Okay, so how should you arrange your 401k / IRA / your portfolio in general? This is where things become highly personalized, as they depend a lot on your tolerance for risk, your age, your goals, etc. Your portfolio should probably be a mix of diversified stocks and bonds. Stocks are riskier investments that can move around a lot, whereas bonds are more stable / less risky, but don't offer as great a return as stocks do. The general idea is that when you're young, you can afford to invest more of your portfolio in equities / stocks because you have a lot of time to absorb negative downswings / build wealth, whereas if you're older, you may want more bonds in your portfolio to stabilize things and prevent you from losing too much in a downswing as you're nearing retirement age. You'll find all sorts of heuristics out there, but a simple one is this: 1/3 allocated to the total US stock market 1/3 allocated to the international stock market 1/3 allocated to the total bond market If you're using Vanguard, for example, this might mean using the index funds VTSMX, VGTSX, and VBMFX. And then every year or so, you "rebalance" your portfolio by adjusting your allocation percentages so that everything goes back into 1/3 1/3 1/3 ratio (some pieces will outperform others, so rebalancing means you are in effect buying low and selling high without market timing, and calibrating everything back to your desired risk profile). If you invest in something like a Target Retirement account, this is all handled for you. It's also important that your funds be low-cost. This is built into something called the "expense ratio" (which is listed explicitly). If you need a guide: <=0.10%: Fantastic 0.11% - 0.25%: Perfectly fine 0.26% - 0.30%: Probably OK, but maybe look for alternatives, if possible. 0.31% - 0.50%: Ehhhhhhhhhhhhhhh... Over 0.50%: Forget it, unless it's something really good. Most likely too expensive, though. If your funds aren't low-cost, they will really eat at your gains over the long run. Last edited by Reincarnate; 02-25-2015 at 10:24 PM..