Financial Experts: HELP!!!?
Ok, I'm starting a new job, and I have to set up my 401K. I remember taking a finance class in college, and the instructor told me that there was a formula, based on age, to determine where you should put your money. You put so much in high risk, so much in low risk, and so much in between, and then you change it slowly as you age. The problem is, I can't remember that formula. Can anyone help?
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This very basic formula is :
100 - your age = % of portfolio in equities.
Take you age, and that's the percentage you have in safer investments i.e. fixed income. As you get older, a greater portion of your portfolio gets allocated to fixed income.
This is a very quick and dirty way to start with an asset allocation. You can tweak according to your own risk preferences, add an international component (5-15% of a portfolio), or increase exposure to small caps (again about 10% of a portfolio).
Depending on your age I would look at Government bond funds, or investment grade corporate bonds for the fixed income side. Some plans offer a fixed account which may be paying 4-6%, with no principal fluctuation, that would be a good thing to add some of your safe money to. High yield funds are junk bond funds and can behave more like an equity investment than a fixed income investment, investing in them may give you a higher dividend, but you may not be diversifying your risk.
Also, your plan might offer a "Lifestyle" portfolio, which essentially picks your asset allocation for you based on the year you plan on retiring in. It gets more conservative automatically as time goes on.
Hope that helps!
You are on the right track, but I do not believe you will need a formula. I do suggest, however, that you avoid "Penny Stocks". Those are way too risky. Somehow, I got on a bunch of mailing lists, and keep getting brochures, ads, etc. for these. I write down the price on the day I got the ad, and then track them every few weeks. As of today, 49 are down a lot, and 2 are up a little.
Stick with high quality stocks and "No-Load" mutual funds. You can check the risk level at the library in Value Line and Morninstar.
You should contribute as much as you can to your 401-K, especially if your employer matches some of your contribution.
I suggest you diversify across many companies and industries.
Good Luck!
A "true" formula I am not familiar with - however I do know that the younger you are - the longer estimated work life you have & therefore you can stand greater risk stocks. The long-shots if you will.
If you are nearing retirement age however - you need to invest in a more "sure thing" as you don't need to risk what you have.
younger you are the higher risk you can take 70-30 stocks is what you were thinkign of and it drops slowly over time Fidelty has some good funds that do excatly what you are looking for.
I use a differnt formula diversifying in foreign, market cap and sectors.