How to Allocate a 401K or IRA

Companies all over the United States and the world offer retirement plans for their employees.  Many people take part in contributing to these retirement plans, but many also do not.  For those who don’t contribute, this is a big missed opportunity.  If employers offer a matching contribution, employees who don’t contribute are missing out on free money.

For the people who have a plan that they actively contribute to or manage a retirement plan, congratulations!  While you have taken an important step, if you are not allocating your money appropriately you will miss out on the benefit of growing your money, while at the same time providing yourself safety from large drops in the market or one asset class.  Here we will discuss how you should appropriately allocate a 401(k) plan.

Start with a 65/25/10 Mix

What does this mean?  The average person, with the average risk tolerance, should have their account invested in 65% stocks, 25% bonds, and 10% other investments such as gold, precious metals, commodities (lightly), or real estate funds.

This average investment profile offers significant diversification, as well as the ability to realize a lot of upside.  Over time, this investment mix offers about the same total return as being invested in only stock funds except it accomplishes it with way less risk.  Sometimes bonds grow in value faster than stocks, oftentimes stocks grow faster than bonds, and precious metals, real estate, and commodities typically always go up over time and sometimes spike.

Diversify Within Asset Classes

Within each asset class you still need to diversify.  For instance of the 65% that you have invested in stocks you would never want to have one equity be more than 7% of your total investment.

Some people will tell you to only invest in individual equities because the fees are much lower if you don’t pay mutual fund management fees, but this is highly dangerous.  Most people have no idea how to build individual equity portfolios, and the goal of a 401(k) or IRA isn’t necessarily to “beat the market”.  The goal is to obtain a reasonable rate of return over time that will grow your money significantly quicker than a savings account.  If you don’t have the knowledge of a professional money manager you may hit home runs or you may strike out, but the odds are against your portfolio performing well over time.  Mutual funds invest in dozens or even hundreds of positions within the fund.  Your risk exposure is much much lower.

If you are concerned about fees you should choose exchange traded funds (ETF) funds or index funds like those offered by Vanguard and Ishares.  These funds have extremely low fees because they are not actively managed but their returns net of fees have proven to rival or even beat the average mutual fund.

The way to invest your money in a more granular sense should have your portfolio looking something (or in our opinion exactly) like:

Equity 65%

15% Large Cap Growth Funds

15% Large Cap- Dividend Paying

10% Large Cap Value

10% Mid Cap Fund

5% Small Cap Fund

10% International Funds

Bonds 25%

10% High Yield Bond

10% Short- Intermediate Term Bond (can include treasury securities)

5% International Bond

10% Other

5% Gold, Precious Metals, Minerals, Mining Companies

5% Real Estate Funds


Keep in mind that there is some flexibility within this structure.  While we believe this is a great all around portfolio for a one sized fits all, you may want to allocate your 10% other to individual equities that you personally pick (this is a great way to satisfy your urge to be a stock picker).  Or you could allocate 5% of the 10% other to this.  Or you may want to invest a portion of your bond portfolio to municipal bonds (which are tax advantaged) if you make a lot of money.  But for this to be advantageous you really should be at or near the highest tax bracket, and let’s be honest you probably have a wealth manager already.  Generally speaking we don’t recommend municipal bond mutual funds for the average investor.  If you are a real gold bug, you can also partake in a physical gold IRA like we offer here.

401K Allocation

A good way to view an investment portfolio is each asset class is a different piggy bank, and together a bunch of small piggy banks get fatter than one big one over time.

How Long Do you Have Till Retirement

The stock market always goes up in the long run, or at least it always has since it began trading over 100 years ago.  The problem for people who are nearing retirement age is that when you look at short periods of time, especially those under 5 years, the market can go down, way down.  You need to protect yourself against this.  If you are going to start drawing down on your retirement funds in less than 3-5 years, you need to lighten your exposure to equities.  Maybe you only want your equity portfolio to be 50% of your total portfolio, or even only 30% of your portfolio.  If you do, you need to adjust the above allocations accordingly and proportionally.

Remember that even if you are retired, you have a need to preserve your wealth but you also have a need to maintain some growth because you may need to live on your money for a long time.  Here is a detailed portfolio for someone who is retired but with a need to keep their money invested and growing.

Investment Allocation for A Retiree

Equity 35%

10 % Large Cap Value

15% High Dividend Large Cap

5% Large Cap Growth

5% Mid Cap

Bonds 55%

10% Short Term Bonds

10% Inflation Protected Bonds (can include TIPS)

10% High Yield Bond

20% Intermediate Bond

5% International Bond

10% Other

5% Gold and precious metals including funds holding stock in mining companies, and commodities.

5% Real Estate


Every person is a little bit different.  You will each have a different amount of risk tolerance, you may not need to grow your money at all, or you may need a tax advantaged portfolio.  The two portfolios above are excellent starting points, and if you copy it exactly you should be able to obtain what the real goal of a retirement portfolio really is, to grow your money with a reasonable rate of return while protecting against market fluctuations in any one asset class.  You need to control and manage risk while at the same time making money over time.

Remember that your rate of return is highly dependent on the underlying performance of each asset class.  To compare how your portfolio is doing always compare it to what the S&P 500 is doing, and don’t forget to ask your friends and co-workers.  If you copy the above portfolios you will almost certainly be happy with your performance compared to your associates and the overall market.  A retirement account is never a get rich quick move, it is a long term savings account with strong growth.