401(k) Fund Mapping

401k plans come with a menu of funds that you can use to build your asset allocation. Our method helps you find the best funds for each category of investment, reduce your risk and give you a chance to retire as early as possible.

By mapping your funds to our models, you can have an easy turnkey approach to plugging in asset allocation suggestions. The five core categories of ongoing contributions to your retirement plan that we recommend are:

  • Large-Cap Blended
  • Mid-Cap Blended
  • Small-Cap Growth
  • International Developed Markets
  • International Emerging Markets

This is a different approach than most take, however, is very similar to what financial commentator Dave Ramsey suggests. We believe by focusing on the best long-term asset classes vs all asset classes, that we are tilting the retirement odds in our favor. Empirical evidence suggests this is true.

While there are other asset allocation categories, we use only those five for your ongoing contributions. To reallocate your existing balance from time to time based upon market conditions, we can use all of the options at your disposal, for example (this list is incomplete):

  • Large-Cap Value
  • Mid-Cap Growth
  • Small Cap Value
  • Government Bond
  • International Bond
  • Money Market or Guaranteed Interest Account

The reason that contributions and balances are treated differently is because your contributions are tilted towards the asset classes that do the best long-term. In the short-term however, there are times when you want to be more offensive or defensive. It is those times you might change the asset allocation of your balance temporarily.

Making 401(k) Contributions

Your 401(k) contributions are a dollar-cost averaging (DCA) program. That is, you are adding all the time and simply receiving an average price of acquisition, or cost basis. You want to be piling into the best long-term asset classes over time. Hence, the five categories we listed above.

Constantly changing your contributions is a sort of micro-managing that stands little chance at being effective. Keep your contributions simple. We recommend this very simple and effective approach to making 401(k) contributions:

Investment CategoryLong-term 
Large-Cap Blended20%25%30%
Mid-Cap Blended20%25%30%
Small-Cap Growth30%20%10%
Developed Markets
Emerging Markets

While we know this is difficult, your goal should be to contributed 20-25% of your income to your retirement plan. You have a fighting chance of retiring early if you do that and start young. For those starting later, the higher savings rate gives you a chance to catch up and retire on time.

When the stock market is bad, human psychology is to reduce what you are investing. That is wrong. When the market is low and going lower, that is the best time to invest more.

Rebalancing Your 401(k)

These ideas apply to the existing balance within your 401(k) plan. We treat your balance different than your contributions because sometimes it makes sense to protect your nestegg. This is a “tactical” investing approach.

The times to protect your 401(k) balance from danger are not frequent. It is rare that we will make wholesale asset allocation changes to our retirement plan balance. Examples of when becoming very defensive and conservative made sense was late 1999 to early 2000 before the “tech wreck” and late 2007 to the middle of 2008 before the financial crisis.

What makes more sense is to make subtle asset allocation shifts once or twice per year. Many years there will be no asset allocation shifts, like during a young bull market that we just want to ride. Other years there might be a few extra asset allocation changes as the economy and markets shift due to valuations or new circumstances (a trade war for instance).

When we have signals that a significant market event might be coming, we will choose to protect your balances short-term. Once the storm has passed, then we will advise to return to a more assertive asset allocation after a stock market correction is over.

Depending on the sort of investor your are, will determine just how aggressive or conservative you are. The pre-retiree will be the most likely to reduce equity exposure and the young saver will be the most likely to want to stay fully invested.

If you are a subscriber to 401(k) Alert, we will notify you when we believe becoming more defensive or returning to a normal fully invested position makes sense.

401(k) Mapping For You

The basics of 401(k) mapping are fairly simple. Use the information supplied to you to match the best funds in your plan to the categories listed. If you are a subscriber to 401(k) Alert, we are happy to build a map for you. Once a 401(k) map is built for your company’s retirement plan, we will post it inside of our website for your future reference and for any changes that might occur.

Once you have your 401(k) map, set your contributions appropriately for the type of investor you are. Remember, invest as much as you can, with 20-25% of your income being the goal. When times are rough, try to invest more, not less.

Lifestyle And Target Date Funds

Many retirement plans offer “lifestyle” or “target date” funds. In general we do not advise every using those. We take the same position that Warren Buffet has for many years, that bonds are just not appropriate investments when you are trying to grow a portfolio.

Lifestyle and target dates funds contain bond funds as part of their asset allocation. Even if you are near retirement, we do not advise bonds within funds as you lose many of the benefits of bonds holding within a fund.

Once you retire, structuring a portfolio of individually held bonds makes more sense than funds in almost all cases. Generally, no more than 20% of a retirement portfolio should be in bonds. That is a long topic, but we can discuss it if you ever would like to talk and I will eventually write a piece about that.

Sector and Country Specific Funds

Most retirement plans do not offer access to sector funds and country specific funds. Thus, we exclude sector and country specific funds in our recommendations as most 401(k) retirement plans do not offer those options.

If you have a brokerage window in your retirement plan and would like a more aggressive strategy, then the Fundamental Trends ETF Tactical Investing service might be for you. Sector and country specific funds can be great vehicles for supercharging a retirement plan, but you have to manage the risk even better. We can probably help with that.