How to Allocate Your 401(k)

Periodically reassess your investment mix to ensure you can meet your goals

Did you reassess your 401(k) portfolio this year? Although you might be enrolled in a plan that automatically shifts your investment mix over time, only you know your long-term financial goals and how much money it will take to achieve them. Take a serious look at your retirement account asset allocation annually. The way you divide your investments among different asset categories like stocks, bonds and cash should change as your life circumstances change—and it can have a major impact on your future finances.

Why is asset allocation important?
According to the U.S Securities and Exchange Commission’s Beginner’s Guide to Asset Allocation, Diversification and Rebalancing, asset allocation is a way to minimize losses without sacrificing future potential gains. Stocks, bonds and cash are the three major asset categories. Market conditions that cause one of these categories to experience poor returns will often cause another to do very well. Investing in multiple categories may reduce your risk of losing money while still allowing you to benefit from future gains.

For example, when the market was down a few years ago, many investors took their money out of low-performing stocks. The problem was that many of them waited until they’d already experienced significant losses to take their money out of stocks and put it into safer investments. If the same investors had left their money in diversified stocks at that point, they’d be in a much better position today. Instead, many of them have not recouped their losses, since other markets didn’t rebound the same way stocks did.

What’s your ideal asset allocation?
Your asset allocation depends largely upon your time horizon before retirement and your ability to tolerate risk. You may also want to tie your allocation strategy to your age to determine how you expect your assets to remain invested.

If you have a particular goal in mind, determine how many months or years it will take you to reach that goal. Then ask yourself if you are willing to lose any or all of your investment to gain future returns. If you don’t include enough risk in your portfolio, your investments may not earn a large enough return to meet your goal. That’s why including stocks or mutual funds in your portfolio makes sense if you are saving for a long-term goal, but might not be appropriate if you’re saving for next year’s vacation.

How can you start?
If you have some experience with investing, you might think about creating your own asset allocation strategy. Asset allocation calculators at Nationwide.com and Forbes.com can help you get started. A financial professional can also work with you to evaluate your investments and revisit your goals on a regular basis.