What's the best investment strategy for a recent graduate?July 30, 2012: 6:30 AM ET
I just graduated in May and started my first job this past week. I plan on putting the maximum amount that my company will match into my 401(k). But what should my allocation be? Will a standard 60% stock, 40% bonds allocation work for a brand new investor? — Robert F.
First, congratulations on your decision to start saving right away. By starting early, your savings have more time to benefit from the tax-advantaged compounding offered by plans such as 401(k)s.
How quickly your savings grow, however, will depend in large part on how you allocate your assets. Up until a few years ago, many advisors would have encouraged a client in his early 20s to adopt a very aggressive allocation strategy — say, 80% stocks and 20% bonds, or even 100% stocks. The conventional wisdom was that you would have plenty of time to recover from any short-term dips in the market, and that stocks offer the best long-term growth potential compared to asset classes such as bonds or cash.
But you may want to adopt a more conservative approach, says Leon James, a senior financial advisor at Anchor Capital Management in Aliso Viejo, Calif. "Even at 22 or 23, you have to be careful," says Leon. "We're at a very tenuous position in our economy and you don't want to take a hit that you can't recover from until you're 30."
Ultimately, the right allocation for you depends on your tolerance for risk. If you lay awake at night worrying that a stock market correction will wipe out a big chunk of your savings, then consider a more conservative allocation, such as the 60% stock and 40% bond mix you suggest.
— Marc Mewshaw
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