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Changed my 401(k) Allocation

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Now that my company has officially added a real estate fund to its options, I changed my allocation ratios for future contributions. Half of my employer matching contributions mimic my allocation and the other half is invested in a company stock fund — we don’t get a choice about that half.

Keep in mind that I am currently overweighted in large cap stock funds. Instead of rebalancing, I’m using the new allocations to “catch up” to a more balanced portfolio. Here are the new allocations for the contributions over which I have control:

Large Cap Growth: 5%
Large Cap Value: 5%
Mid Cap Growth: 10%
Mid Cap Value: 10%
Small Cap Blend: 15%
Real Estate Fund: 15%
International Stock Fund: 40%

I have no bond funds because my time horizon is still rather large.

Published or updated April 6, 2006. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.

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About the author

Luke Landes, also known as Flexo, is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about him and follow Luke Landes on Twitter. View all articles by .

{ 3 comments… read them below or add one }

avatar Jeff Sinatra

Asset allocation is great, but I think there’s a trend away from self-managed 401(k)’s to professional management of these accounts. To me, this makes a great deal of sense as most people pay little attention to their 401(k) and it is becoming increasingly more important… IMHO, this is where the industry is going.

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avatar Luke Landes ♦127,465 (Platinum)

Jeff, I deleted your second comment saying roughly the same as your first. Actively managed funds return less after fees than index funds. In my opinion, you have the trend backwards, but we’re just talking about opinions here. Do you have some verifyable statistics about this supposed trend?

Obvisouly your comments are written to promote the services your company (which I removed) provides. I edited them to remove the shlling. I try to let my readers get unbiased opinions here rather than company spokespersons.

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avatar Jeff

Hi Flexo,

This is true if you’re using 100% index funds, which is not prudent due to volitility. Most managed portfolios have between 25% and 35% in fixed income to help mitigate risk, so you’re not really comparing apples to apples. The goal is to get close to market returns, while lowering downside risk with fixed income instruments.

The fixed income component is based on the efficient frontier, which determines the point at which the risk outweighs the potential long term gain. Where this point is will change based on who you talk to, but the 25% to 30% in fixed income is about the range.

I think the underperformance of average equity investors has been well-documented. According to Dalbar’s Quantitative Analysis of Investor Behavior, 2005 (www.dalbar.com) average equity fund investors underperformed by almost 10%. This study seems a bit agressive, and some researchers have questioned the validity of this study (see http://webuser.bus.umich.edu/Departments/Communications/clips/Apr04/Zheng4.04.pdf). However, other experts feel this study actually understates the gap (see John Bogle’s comments, “Is the Dalbar Study Accurate?â€Â? from his speech, http://www.vanguard.com/bogle_site/sp20031103.html).

I personally think the Dalbar number is a little overstated, but many experts agree that average investors have underperformed the overall market by anywhere from 2.7% to as much as 10%.

Of course, if fees for a managed 401(k) service are over 1%, then the actual ROI on using a managed service is diminished. I recommend that managed account services have a capped annual fee and stay well below 1%…

The fact is, about 50% of people have no idea how to build even a basic portfolio and could be benefited by having a professional manage their account for them.

Personal note: Sorry for sounding like a company spokesperson… That was not my intent, but I can see how it would come off that way.

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