In this day and age of DIY tutorials and life-hacks, you might be tempted to do your 401k all by yourself. But be wary, brave traveler! There are several pitfalls you could get into if you follow this path.
Pitfall #1: Being Too Conservative
The old rule of thumb was that if you subtract your age from 100, then that should be the percentage of stocks in your portfolio. For example, if you were 20, then 80% of your portfolio would be in stocks, and 20% in bonds.
With Americans living longer, and empirical evidence of higher long-term returns from stocks vs. bonds, this framework is a bit outdated. Instead, raise that number to 110, or even 120. So, your portfolio would have 90-100% of stocks.
Pitfall #2: Being Too Aggressive
We know, we know. You literally just read not to play it too safely. But here’s why you shouldn’t be too reckless with your investments. Say you’re less than 5 years away from retirement. We recommend that around 40% of your 401k get invested in bonds, with the other 60% in stocks.
As folks start getting closer to retirement, their nest egg needs to be safer from a market crash or a decline in stock prices. That’s why blooom continually monitors and periodically rebalances our clients’ accounts as they get closer to retirement, bringing down the percentage of stocks and increasing bonds.