How to Invest the Money in Your 401(k) Plan

Key Takeaways

• If you have 20+ years until retirement, you can invest up to 100% in equities; if 15-20 years, start tilting toward bonds; within 10 years of retirement, consult a specialist to build income ladders for your first decade of retirement
• Avoid active funds and choose passive index funds instead because active fund managers historically cannot consistently beat benchmarks, while passive funds offer lower expense ratios and built-in diversification
• Within your US equity allocation, tilt toward small-cap value stocks instead of large-cap funds—historically small caps returned 12% versus 10% for large caps since 1927, which compounds to nearly double your money over 30-40 years
• Include international exposure with a 60/40 US-to-international split, and tilt your international portion toward emerging markets to capture higher volatility-driven returns over long holding periods
• Use long-term time horizon quilts (15+ years) rather than annual performance quilts to guide allocation decisions, as short-term performance patterns are unpredictable but longer-term patterns show consistent winners