Think of your retirement fund in terms of two distinct portfolios: stocks and bonds. How you divvy up money between stocks and bonds depends heavily on your appetite for risk. Remember: the higher your allocation to stocks, the higher your risk. "It depends on an individual's circumstances, but somewhere between 40 percent and 60 percent stocks is where most people should be," says Stephen Barnes of Barnes Investment Advisory.
For the stock portfolio, Barnes recommends devoting 60 percent of assets to funds that focus on large companies, 30 percent to funds that invest in small and midsize companies, and 10 percent to a fund (or funds) that invest in emerging markets. "We no longer differentiate between foreign and domestic stocks—globalization has reached the point where it's getting too difficult to draw hard lines," he says.
Aim for variety not only in company sizes but also in investing styles: Hold funds that specialize in fast-growing companies, as well as those that focus on finding undervalued firms (some funds invest in a combination of both).
When it comes to bond money, Barnes suggests keeping 20 percent of assets in high-yield bond funds, 20 percent in funds that invest in foreign bonds, and the balance in investment-grade bond funds.
- 60 percent large company stocks
- 30 percent small and midsize company stocks
- 10 percent emerging markets
- 60 percent investment-grade securities
- 20 percent foreign bonds
- 20 percent high-yield bonds
Source: Stephen Barnes of Barnes Investment Advisory