The financial crisis also revealed painful blunders. One in four baby boomers had 90 percent of their money invested in stock funds. On the verge or retiring, most of their money was hit by the 57 percent loss in the stock market. Yet people who followed a more conservative mixture of 60 percent in stocks and 40 percent in bonds have recovered and then some.
These struggles, however, are not necessary. Anyone who knows how to copy can simply use a new type of mutual fund as a cheat sheet to mimic.
The fund type is called a target-date fund, and 401(k) plans increasingly offer them. You can recognize them because there is a number in the name. More precisely, it is the year when a person intends to retire. For example, if you are 55 and plan to retire in nine years, you would select a fund carrying the date 2020 in its name. If you are 45, you would probably pick the 2030 fund.
If your 401(k) does not offer these funds, you can still find one or copy one. Contact a mutual fund company such as Vanguard, Fidelity, or T. Rowe Price and ask for the fund that carries your retirement date in its name. You could plop it into an IRA, or use its description as a model for picking funds in your 401(k).
Say, for example, you think you will retire in 2020 and have no idea how much money you should put into stock or bond funds. So you decide to look at the Vanguard Target Retirement 2020 fund as a model. Find details at morningstar.com. Type the fund's name in the box at the top that says "quote," and then click on "portfolio" to see how your model fund selects stocks and bonds. The box called "asset allocation" shows it.
Looking at specifics
You will see that this fund would invest 1.5 percent of your money in cash, 46.8 percent in mutual funds that invest in U.S. stocks, 18.9 percent in mutual funds that invest in non-U.S. stocks (or companies in foreign countries), and 32.3 percent in mutual funds that invest in bonds. This is your basic model to copy, and if you further peruse "style details" below the asset-allocation chart, you will see how to select funds that prefer either large or small companies.
But be aware that target-date funds are designed to help your money increase over time. That does not mean they always increase your balance. Because there are stocks in the model, you will likely lose money in years when the stock market is declining and gain when stocks are climbing.
For example, 2008 was horrible. People with money in the stock market lost 37 percent of it that year, but the target-date fund you are eyeing has bonds. Bonds tend to be more stable when stocks are crashing, and the bonds did what they were intended to do: They took some of the sting out of the slaughter.
Remember also that what is right for you today will not be in five years. Target-date funds change your stock and bond mixtures every year so you are less prone to large losses as you age. Each year, you should check your 2020 model again and tweak your mixture of stocks and bonds to roughly match it.
Gail MarksJarvis is a personal finance columnist for the Chicago Tribune. E-mail at firstname.lastname@example.org.