Where you put your money to attempt to maximize your returns while protecting your money is the subject of countless studies and makes up the primary job of many financial professionals.  My suggestion for asset allocation is far simpler than what many of these professionals would recommend, and due to ultra low fees, the returns are likely better.

The first questions that need to be answered for asset allocation is a) What is the money for? and b) How long until you need it?  For definitive expenses (like your emergency fund or saving for a major purchase in the next year or two), the money should be in something safe, like a CD or a money market fund.  For something like retirement or other longer-term investing, it’s more interesting.  Here is a starting example:

Age 25, Planned Retirement Age 65:  Years to Goal: 40 years

For anything 25+ years to the goal, my recommendation is a 90%/10% stock/bond ratio.  This isn’t magic, but certainly with a long time horizon, history has shown the vast majority of your money should be in stocks.  I prefer a diversified group of index funds of all sizes, both domestic and international.  You could go a long way to achieving this with just two funds: 60% in Vanguard Total Stock Market Fund (VTSMX) and 30% in Vanguard Total International Fund (VGTSX), The other 10% of the money can go into bond funds, such as Vanguard Total Bond Fund (VBMFX) and Vanguard Total International Bond Fund (VTIBX).  I’m a big fan of Vanguard for their low fees, but if your 401k does not offer these funds hopefully you can find some similar funds that have very low fees—less than 0.2% should be standard for an index fund.  For God sakes hopefully the funds they offer have no loads (sales commission). Aside—this is completely wasted money.  “Sales Loads” are money paid to the salesperson for “selling” you the fund.  They are so worthless you likely didn’t even know they sold you anything.  This is different from the higher fees that actively managed funds (vs index funds) charge, that money is actually for the person picking stocks for you, but isn’t worth it either. 

The suggested allocation looks something like this

• 60% Vanguard Total Stock Market Index Fund
• 30% Vanguard Total International Index Fund
• 8% Vanguard Total Bond Market Index Fund
• 2% Vanguard Total International Bond Market Index Fund

The above can be substituted for other equivalent index funds, you are looking for funds with fees of <0.2%.  This gives you a broadly diversified portfolio in just four funds.

Once you get within 25 years or so from your retirement age, you want your portfolio to start to get more conservative, meaning a shift from stocks to bonds, such that at retirement you have something close to 50%/50% split of stock and bonds.  I’ll have a future post on the logic of this allocation in retirement.  This can be achieved by shifting your allocation by 1.5% from stocks to bonds with each year. For the ratio of the above funds at years until retirement, for example,

• 25 years to go (60%/30%/8%/2%)
• 15 years to go (50%/25%/20%/5%)
• 5 years to go (40%/20%/32%/8%)
• At retirement (35%/18%/38%/9%)

Target retirement funds attempt to do this adjustment for you and there are some of these that invest in low-cost index funds, but I usually like to have this control myself.

That’s it, not complicated.