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Diversifying your 401(k)
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March 31, 2000: 12:44 p.m. ET
Expert advises a 32-year-old to expand beyond an S&P 500 fund
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NEW YORK (CNNfn) - Some people stick to tradition when it comes to investing and keep all of their retirement money in an S&P 500 mutual fund. But if you've got 30 years until retirement, should you be more aggressive?
In response to a reader's question, Heather Locus, a certified financial planner from Schaumburg, Ill., and a member of the Financial Planner Association, advises more diversification.
Ask the experts a question.
I am 32 years old and have $60,000 invested in an S&P 500 mutual fund in my 401(k). I'm contributing 15 percent of my income, presently $72,000, and I would like to know if I am investing too aggressively. Should I invest some money in small caps or emerging markets? How do I compare with other 32-year-olds with similar salaries?
At age 32 you are doing very well. The average adjusted gross income (AGI) for all tax returns filed for 1997 was only $42,167. The Profit Sharing/401(k) Council of America found in a recent study that the average pretax employee deferral was between 5.1 percent to 6.1 percent, depending on income level. At 15 percent, you are well above the average, and contributing the maximum $10,500 the IRS will allow for 2000.
The U.S. Department of Labor, Pension and Welfare Benefits Administration estimated that in 1998 there was $1.4 trillion of assets in 401(k) plans with an estimated 37.9 million participants. This averages out to $36,939 per participant, so again you are well above average.
All these statistics are interesting, but the most important thing is to determine if you are on track for your own specific goals.
As for your allocation, you certainly have been in the right asset class (large growth) for the last five years, which probably has significantly contributed to your large accumulation for your age. However, I would recommend that you diversify among small-cap and international asset classes as well. The year-to-date return through March 21 for the S&P 500 was 1.81%. The return for most small-cap growth funds was more than 30 percent in the same time.
Having money in various asset classes helps to reduce volatility. Over long periods of time, all three of the large-cap, small-cap, and international asset classes tend to have similar average returns -- 10 percent to 12 percent, depending on what time period you use.
In general, a good allocation might be 50 percent to 55 percent in large caps; 22 percent to 27 percent in small caps; and 20 percent to 25 percent in international stocks. A combination of growth and value in each asset class would be ideal if you have those options.
Discussing your individual risk tolerance and investment choices with a qualified professional could help you determine the best fit for you. Many companies now offer employee education on their retirement plan choices through independent professionals, either free or at a minimal cost as an employee benefit. If your company does not, you may want to suggest it to your Human Resource department. 
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