Spread your money around
You don't need to have the stock-picking skills of Warren Buffett to build a nest egg. Here's how to allocate your portfolio in a way that can get you most of the way there.
(MONEY Magazine) -- However much you save, you still want to make sure that you're smart about your investments. That doesn't mean you have to be the next Warren Buffett.
What you must do, though, is choose a suitable combination of stock funds, bond funds and other investments. The idea is to create a blend of assets that's aggressive enough to improve your odds of earning the returns you need, but not so risky that you'll panic during market downturns and bail out.
This may sound difficult in its own right, but most 401(k)s offer a simple and perfectly prudent solution: a target-date retirement fund. These funds, which invest in stocks, bonds and other assets, create a portfolio geared to someone who plans to retire in a particular "target" year. Just pick the fund whose target is closest to your desired retirement date. (One tip: Don't mess up your allocation by investing in other funds too.)
If you prefer a more tailored mix, use the Asset Allocator tool and answer the questions about your time horizon and tolerance for risk. Once you and the computer settle on a portfolio, you'll need to select stock and bond funds to fill it.
Just remember one simple rule: Stick with low-cost funds, which let you keep more of the returns. How can you tell which funds in your 401(k) are low cost? Many large-company plans offer funds that mimic market indexes (look for the word "index" or the name of an index like the S&P 500 in the fund's name); expenses often run less than 0.3% of assets a year.
If you can't fill your portfolio with indexers, look for choices that have generic names such as Small-Cap Value or Large-Cap Growth. These institutional funds also generally have modest fees - say, 0.7% of assets for stock funds.
In any event, stick with stock funds that charge less than 1% and bond funds with fees under 0.5%. Your plan's administrator can tell you each fund's expense ratio.
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