Retirement plan decisions made easy
Drill Down: Investing Your Stock Money
Your stock market investments should be well diversified among different types of stocks, including both United States stocks and foreign stocks. Be certain that your United States holdings include small cap stocks. Your foreign stocks should be split among developed countries and emerging markets, if you have those choices. If you have all of these opportunities, I recommend that you divide up your investments in proportion to the value of different classes of stocks. For example, of all the stock traded around the world, 40 percent of the value is in United States stocks. Therefore I recommend that 40 percent of your stock investments be in American companies. This gets you the maximum diversification possible.
Basic Stock Market Allocation
40% U.S.
34% S&P 500 (or similar large cap index)
6% small cap
60% Foreign
48% developed countries
12% emerging countries
Your particular 401k plan may not give you all of these options. Don’t fret. The minor details are not terribly important.
Two of these four components have historically offered higher long run returns: U.S. small cap stocks, and emerging country stocks. There’s a good argument for overweighting them, if you are comfortable taking a little more risk. You might, for example, allocate 12 percent to small caps and 24 percent to emerging countries at the most aggressive end of the spectrum. Don’t go overboard, however, or you lose the benefit of diversification.
So the process is this:
- Based on your tolerance for risk, pick the split between stocks and bonds.
- Make sure that your stock holdings are well diversified among large stocks and small stocks, and between United States and foreign stocks.
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Lesson 1: What the Heck is a 401k, and What’s So Great About It?
Lesson 2: Contributions to Your 401k
Lesson 3: Investments “Cook Book” Approach
» Lesson 4: Investments: How Investments Work
Lesson 5: Loans and Hardship Withdrawals from Your 401k
Lesson 9: Your 401k, Your Other Assets, and Your Life
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