Robert Brokamp: Hello I'm Robert Brokamp with the Motley Fool and today we are going to talk about how to diversify your 401(k). We are going to start with the Fools rules for asset allocation and that starts with any money you need in the next few years should be encash, you want to keep it safe from the stock market crash or even a bond market crash. So if you are close to retirement protect the money you need in the first few years. Rule number two is then, consider your risk tolerance that is how much volatility can you stand in your portfolio before you kind of freak out and here is an easy way to answer that question. What did you do during 2007 to 2009 as the stock market climbed by 50%? Did you buy more stocks? Did you see it as a buying opportunity? Did you hold on or did you sell?
If you sold stocks because you couldn't sleep at night as your 401(k) was cut in half then, you should have some of our portfolio out of the stock market and encash or bond. Same goes for someone who is close to retirement. Now any money you don't need for the next several years is a candidate for stock. Here are some good rules of thumb. You can invest three quarters of your stocks in the United States and one quarter in international stocks and then once you have that divide your stocks into thirds investing one third each into large cap stocks, mid cap stocks and small cap stocks.
And finally keep your true time horizon in mind, you'll be investing for the rest of your life which could last well into your 90s. So many think that their time horizon extends to just the day they retire, but you actually need just a portion of your portfolio on the time and then you'll need some of it in your 70s, some of it in your 80s and some of it hopefully well into your 90s.
So unless you are a black motorcycle rider who smokes, you likely have decades of retirement, planning and investing ahead of you, so for the time horizon that long stocks have historically been the best investment.
I'm Robert Brokamp with the Motley Fool and that's how to diversify your 401(k).