The New Commonsense Guide to Your 401(k): Rebuilding Your Portfolio From The Bottom up

Chapter 47. Diversify

ONE OF THE MOST BASIC PIECES of advice to investors is: diversify. Ten years ago, I told 401(k) plan investors that asset allocation—or selecting the right mix of asset classes such as international stocks, small-company stocks, large-company stocks, and bonds—was the key to successful investing. Combining different asset classes allows you to include assets that seem risky by themselves, like small stocks or emerging markets, and still create a portfolio with low volatility because of the correlation between these assets and they way they offset each other. Today, most investment professionals still advocate that strategy.

If you are an experienced investor, go for it. For the rest of us, investing has grown more complex over the past decade, and we may not feel like spending so much time parsing large-company stocks and separating them into core, growth, and value. For better and for worse, many employers who implement 401(k) plans for their employees have simplified the job by offering managed accounts, which means that a professional manager puts together a mix of asset classes and offers it in more and less aggressive flavors. The fastest growing type of fund investment is the target-date fund. The investor chooses the year he hopes to retire and makes that his target-date, such as 2030, and invests in the target-date 2030 fund.

Target-date funds were seen as a nearly miraculous solution to the problems of picking investments for the 401(k) plan, at least ...