- 1). Determine your appropriate allocation percentage to stocks by subtracting your age from 100. Adjust this number upward if you are more tolerable to large swings in your 401(k) balance or downward if you would like a more steady balance. This is your Total Stock Allocation; write down this percentage.
- 2). Determine your appropriate allocation percentage to bonds by subtracting your Total Stock Allocation from 100. This is your Total Bond Allocation; write down this percentage.
- 3). Calculate 80% of Total Stock Allocation to identify how much you should invest in U.S. domestic stock. Assign the remaining 20% of your Total Stock Allocation to international stock to diversify your holdings. Write down these percentages.
- 4). Split your Total Bond Allocation in half and assign equal parts to nominal bonds and inflation-protected securities. Write down these percentages.
- 5). Review the list of funds offered by your 401(k), matching fund names to the classes you have identified in your allocation plan: domestic stock, international stock, nominal bonds, and inflation-protected securities. Pick only one fund per class, ideally selecting the one with the lowest fees, identified by a low expense ratio, and the broadest diversification.
- 6). Revisit your allocation plan every 10 years and re-allocate your 401(k) accordingly by exchanging between funds. Due to the tax-sheltered nature of a 401(k), such re-allocations generally do not create tax liabilities.
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