I'm a fairly boring investor. Although 90% of my heavy on diversity.
I have time on my side: I don’t expect to touch the for about 30 years. This gives me a chance to ramp up my now. As I approach retirement, hopefully I can adjust my retirement account composition.
I've found that one of the most challenging aspects of retirement planning is figuring out how to allocate the assets in your portfolio.
You need to have a practical approach to your 401(k) and a good plan in place if you want to maximize your earnings. But where to start? I'll tell you that in just a minute.
For me, I've set up my retirement account (it’s actually an IRA) with the following types of ETFs:
- 22.5% All-Market
- 22.5% Large-Cap Value (US)
- 7.2% Mid-Cap Value (US)
- 6.3% Small-Cap Value (US)
- 22.5% Developed Markets (International)
- 9% (International)
- 5% TIPS
- 5% Short-Term
Not sure where to start? There is a secret to allocating funds, and once you know that secret, it's golden.
Here it is: Know your risk tolerance.
That's right. Understand yourself. Have an idea of what you can handle financially and emotionally. When you have a higher risk tolerance, your portfolio can benefit from a more aggressive approach.
For example, when you are younger and better able to deal with market setbacks, it can be a good time to choose an asset allocation that heavily favors . You might even have some alternative , such as that invest in currencies or commodities. As you age and approach retirement, your 401(k) asset allocations should shift more toward such as bonds.
Analyze your risk tolerance and choose an asset allocation that fits with where you are in your financial life, and where you stand with regard to retirement.
Another basic rule of (and something that I follow diligently): Diversify. Make sure you have sufficient diversity in your 401(k) or IRA asset allocation. With the right diversity, it’s possible to maximize your earnings, and even to hedge a little when markets struggle. One strategy is to use a allocation that includes foreign , and include bonds, REITs, alternatives ( and ETFs) and in your portfolio.
One great strategy to boost your earnings (and it’s one I’m looking into) is adding a dividend fund. It’s possible to use dividends, and their reinvestment, to supercharge your portfolio building efforts. As you reinvest your in your retirement account, you can boost the number of you own, thereby increasing your payouts and creating a cycle that helps you amass a larger nest egg a little bit faster.
Another great reason to include and/or funds in your tax-advantaged 401(k) is that you don’t have to pay on the in the you earn them. If you keep in a taxable account, you pay on the , even if you are participating in a reinvestment program. You can use your IRA or 401(k) as a tax shelter for this .
You can also use your tax-advantaged account for other -type , like bonds and REITs, to shelter yourself from paying taxes on your earnings now. Consider allocating more or REITs to your IRA or 401(k) to make use of this tax-deferred . with pre-tax dollars means that you get a little more bang for your buck at the outset.
There is also the of a Roth account. If you want your earnings to be , a Roth 401(k) or Roth IRA can be a great way to maximize your account. You have to contribute with after-tax dollars, though. Over time, a Roth version can really help. If you keep your , REITs and your bonds in a Roth 401(k), you won’t have to pay taxes on the earnings, so they grow in a rather efficient manner, especially if you keep reinvesting your and interest.
The Answer: Your 401(k) asset allocation should reflect your risk tolerance and your end goals. Pay attention to diversity, as well as the advantages that can come with holding some of the -generating in a Roth account.