I always get asked questions like “How should I invest my 401(k)?”    

These questions have become the norm over the last five years, as most of my friends and family know that I’m a financial planner who helps people prepare for retirement. 

I decided it would be best to detail the most critical ingredients in building a killer 401(k) portfolio.   

Asset Allocation  

“Asset allocation” is a big phrase that advisors use to justify their expenses. When you hear the phrase “asset allocation,” all it indicates is the percentage of your account that is invested in stocks and the percentage that is invested in bonds.   

Some common allocations would be a 60/40 (60% stock and 40% bond) or 90/10 (90% stock and 10% bond).   

Your allocations will determine your expected rate of return and risk. If you put too much money in stock, your account will drop a lot when the market goes down. If you put too much into bonds, your retirement account won’t be as volatile, but it won’t go up a lot either.   

Finding the correct allocation for your portfolio is extremely important to your future retirement. In general, the younger you are, the more stocks you should have in your account, and as you approach retirement, you should increase the allocation to bonds in your portfolio.    

Fund Selection  

Once you determine your ideal allocation, you should probably pick some mutual funds or exchange-traded funds (ETFs). Investing has changed a lot over the last 15 years, and as Americans, we now have access to almost any stock or bond market in the world. You should take advantage of it!   

Over a long enough period of time, a globally diversified portfolio will always outperform one that just invests in U.S. markets.   

Your retirement account should be invested in U.S. stocks, international stocks (U.K., Germany, Japan, etc.), and emerging market stocks (China, Brazil, India, etc.). It should also be invested in U.S. bonds and international bonds.  

Your retirement plan should have funds that give you exposure to the above markets. If it doesn’t, get a new retirement plan!   

Expense Ratio  

All the positions in your investment accounts will have expenses. These are charged by expense ratios, which are fees you pay on your mutual fund and exchange-traded funds. These fees go to the fund company (e.g., American Funds, Vanguard, Fidelity, Dimensional Fund Advisors)  and are automatically deducted from the fund quarterly.  

Typically, fees can range from 0.05% all the way to 2.00%. In a way, these fees are hidden as you will never see the dollars leave your account.

If you are paying high fees on your funds (anything over .50%), the performance of that fund had better be incredible or you will end up making someone else rich.   

Tip: If your 401(k) has only funds with expense ratios over 1.00%, consider opening an IRA or Roth IRA and use that to save for retirement.

Tracking Your Account  

Once you have selected your asset allocation and lowest fee funds, you should track the balance of your account. I have clients who do this by hand or using Excel, but another easy way to do this is to use an online software like mint.com. (We give our clients access to software that will do it for them.)   

It doesn’t really matter how you track it — the idea is to create mindfulness about the balance of your retirement account.

Tip: If the balance isn’t growing, increase your contributions!

Be careful not to check too frequently, as you will be prone to react to swings in your account balance, and you will most likely make a mistake you will regret later in life, like selling at the bottom of the market.     

To avoid this, we recommend that our clients check their accounts only every six months to a year.   


If all of this seems too complicated, pick a target-date mutual fund with a low fee. The target date should be within five years of your desired retirement age. For example, if you think you are going to retire in the year 2027, pick the “INSERT FUND CO NAME 2030 Fund.”   

Or you could just hire a fee-only financial planner 🙂 !