401(k) Asset Allocation for 23 Year Old

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nszzya
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401(k) Asset Allocation for 23 Year Old

Post by nszzya » Wed Jul 11, 2018 1:33 am

My 23-year-old daughter just became eligible for her company's 401(k). She'll contribute about 6,000/yr. I'm helping her with AA and would like to construct a three fund portfolio (thinking 80:20 or 90:10 with 20-25% intl equities). The plan includes iShares S&P 500 Index Fund K and iShares MSCI EAFE Intl Index Fund K but no bond index fund. The bond funds available are Metropolitan West Total Rtrn Bd Fd I (MWTRX) and PIMCO Income Fund Inst (PIMIX). At her age, would it be reasonable to forego the bond component and go 100% equities? Or choose one of the bond funds offered?

Namille5
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Re: 401(k) Asset Allocation for 23 Year Old

Post by Namille5 » Wed Jul 11, 2018 1:52 am

Hi nszzya,

I would absolutely still include bonds in your AA and not go 100% equities. Having a 90:10 or 80:20 AA would suffice and not sacrifice much return relative to the risk. Also, having at least 10% bonds will allow her to develop good habits of rebalancing her portfolio. She will effectively be selling high when equitis are booming, and purchasing when bonds are low (fundamentals). Typically, people that go 100% equities do not rebalance and develop a “set and forget” mentality which can be detrimental at an older age.

I hope that helps. :happy

venkman
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Re: 401(k) Asset Allocation for 23 Year Old

Post by venkman » Wed Jul 11, 2018 2:48 am

Assuming she has the risk tolerance for it, she should be fine to be 100% equities right now. For the first few years, the contributions she's making will add to the account far more than the returns.

And, she can always open an IRA and put the bonds there, in funds with lower expense ratios.

TwstdSista
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Re: 401(k) Asset Allocation for 23 Year Old

Post by TwstdSista » Wed Jul 11, 2018 4:09 am

^ Agreed.

Is there a low cost Target Date Index fund she could invest in?

averagedude
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Re: 401(k) Asset Allocation for 23 Year Old

Post by averagedude » Wed Jul 11, 2018 5:01 am

At 23, she has an enormous amount of human capital. 100% equities would be the optimal choice. If she is risk averse most target date funds start at 90% and then have a glide path that reduces your stock portion as you age. Studies do show that people in target date funds are less likely to sell in major market declines. Either choice she should be happy when the stock market is going down and not so happy when the stock market is going up.

dogagility
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Re: 401(k) Asset Allocation for 23 Year Old

Post by dogagility » Wed Jul 11, 2018 5:21 am

Agree with the other comments that 100% equities is optimal for growth given her age. Many people do/did that (including me) at a young age. Make sure you instruct your daughter to contribute to (but not sell) the equity portion no matter the news of the day.
Taking "risk" since 1995.

indexonlyplease
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Re: 401(k) Asset Allocation for 23 Year Old

Post by indexonlyplease » Wed Jul 11, 2018 5:39 am

For someone that young with no knowledge in investing the Target Dated Fund would be great for her. Maybe in the future if she want to learn about investing she could change. But the Target Dated Fund makes investing so easy for someone just starting out. No decision on funds or percent of funds she needs to make.

We put my 22 year old son in the Target Dated Fund.

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Psyayeayeduck
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Re: 401(k) Asset Allocation for 23 Year Old

Post by Psyayeayeduck » Wed Jul 11, 2018 6:35 am

indexonlyplease wrote:
Wed Jul 11, 2018 5:39 am
For someone that young with no knowledge in investing the Target Dated Fund would be great for her. Maybe in the future if she want to learn about investing she could change. But the Target Dated Fund makes investing so easy for someone just starting out. No decision on funds or percent of funds she needs to make.

We put my 22 year old son in the Target Dated Fund.
+1

If one is starting out and doesn't know where to park their money at the moment, a target fund is a great starting place. The younger the person, the further the target date should be. Once the investor becomes comfortable with what is involved with their retirement, then they can take the initiative to fund what they feel comfortable with. Even if they just continue investing in the target fund without learning a single thing, the allocation is done automatically for them. Granted, not the greatest as ERs are usually higher than doing it yourself but not the worst.

jumppilot
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Re: 401(k) Asset Allocation for 23 Year Old

Post by jumppilot » Wed Jul 11, 2018 6:40 am

I vote 100% equities.

At her age, her future earnings are her “bond” portion.

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Tamarind
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Re: 401(k) Asset Allocation for 23 Year Old

Post by Tamarind » Wed Jul 11, 2018 7:08 am

If she hasn't already, she should open a Roth IRA and consider holding her bonds there.

100% equities are ok for someone this age, but 10-20% bonds might be better for someone who's never experienced a market downtown.

nszzya
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Re: 401(k) Asset Allocation for 23 Year Old

Post by nszzya » Wed Jul 11, 2018 11:39 am

Tamarind wrote:
Wed Jul 11, 2018 7:08 am
If she hasn't already, she should open a Roth IRA and consider holding her bonds there.

100% equities are ok for someone this age, but 10-20% bonds might be better for someone who's never experienced a market downtown.
She does have a Roth IRA and I should have thought of that. I wasn't thinking globally enough to consider her entire portfolio. She has 17,000 in the Roth all in DFA DIMENSIONAL 2040 TGT DATE RET INCM I (DRIHX) and about 5,000 in an after tax account all in DFA Global Allocation 60/40 Portfolio Institutional Class (DGSIX). Both accounts are at Schwab. I'll rework the allocations to get where we want to be.

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