My very first disclaimer for this post is this – if it’s quick and fast, it’s probably not that good. That assessment would be truthful, but as I wade through all the benefits signup at a new position in a new company, I am looking for all the shortcuts I can. This trick is one I learned from a hardware engineer two jobs ago, at Entek in Cincinnati, Ohio.
His super secret method for quickly allocating his initial 401k investments was… drumroll please… an easy-to-remember math trick. Think about these four numbers 40, 30, 20, 10. They are descending in order, four values, multiples of ten, but most importantly, they add up to 100.
So for your initial 401k allocation, look at the risk levels for all your investment choices, whether they are mutual funds, bond funds, or stock. Then, depending on your age and aversion for risk, select four investment choices in descending order of risk. If you are “young,” say under the age of 30, and have many years to save for retirement, put 40% of your investments in a high risk investment. Then put 30% in the next highest risk, 20% in the next highest risk, and 10% in a bond fund. As your account grows, check the allocations and re-allocate if needed, and as you age, change the risk level of the highest percentage amounts you have invested. Here’s an example:
- 40% high risk (but only choose funds that invest in things you want to have in your portfolio)
- 30% moderate risk (or whatever risk level will let you sleep at night)
- 20% moderate risk (or whatever risk level will let you sleep at night)
- 10% bond fund (or something similar that is low risk)
Yes, it is a pretty silly method for allocating 401k investements, and of course returns are not guaranteed, but it allows you to make that snap decision on investments to get the account set up, and then re-allocate later.