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How can I properly diversify my 401k?

Answers:1   |   LastAnswerAt:2011.03  

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lei 
Asked at 2011.03.23 19:38:09
I have a 401K through my employer. It is 100% vested.I'm 21, and a recent college graduate, so I'm told I have a lot of room to make mistakes, but I would like to avoid as many money mistakes as possible. I only have approximately $300 contributed to my 401k so far, because I don't understand how to diversify my portfolio. I have a number of options to choose from, but I don't know how to tell if they are "good" or not. They are: JP Morgan Stable Value, PIMCO Total Return, Vanguard Balanced Index, H&W Large Cap Value, Marsico Growth, BGI S&P 500 Equity Index, Artisan Samll Cap Value, MS Small Company Growth B and MFS International Equity. I need to invest in percentages equalling 100%, but I'm not quite sure how to choose to my financial advantage. How can I properly diversify my portfolio? Answers are greatly appreciated! Thanks in advance!
answer Dave W  Answered at 2011.03.23 19:38:09
If I were that young, I'd be willing to take more risk in order to get a higher return. It's a very long time from 21 to retirement, so even if the market drops sharply, there is lots of time for it to recover. For that reason, I'd go heavily toward Small Company funds (which looks like Artisan Small Cap Value and MS Small Company Growth B in your list). Small company stocks have historically provided the highest return over the long run. I'd avoid the Stable Value and any bond funds. Those are less volatile, but will not provide anywhere near as high a return in the long run as a stock fund likely will.

Personally, I'd put 20% in the International fund (it's a world economy now and that diversifies the portfolio away from just the US market) and split the rest about evenly between the two small company funds. I think most advisors would recommend putting only 20-30% in the small company funds and the rest in large company stocks (S&P 500, Large Cap Value, etc.) but with 30+ years to go, I'd personally go with the slightly more volatile small company stocks to get the higher return that they have historically provided.

Just remember not to panic and move the money out of those funds if the market dives and your account value drops. You have to stay in for the rise that comes after the fall in order to get the higher long-term returns from the more volatile investments.
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