Do you have too much in stocks in your 401(k)?

Americans are investing more in stocks than ever before in their 401(k)s. But is it too much?

A growing allocation to stocks

Workers are investing more aggressively in their 401(k)s. In 2024, the average stock weighting in target date funds for workers beginning their careers was 91%. A decade earlier, it was significantly lower at 85% according to investment data firm Morningstar.

In 2024, target date fund investors at career end had an average 32% in stocks, although many retirement year allocations in larger plans clocked in at closer to 40% or higher. A decade earlier, the average plan had only 23% in stocks.

Vanguard confirms similar patterns for workers invested in the 401(k) accounts it administers. Investors in their early 60s have 60% in stocks, compared to 57% a decade earlier, as reported by the Wall Street Journal.

What’s behind the move to more stocks

There are several reasons behind the growing allocation to stocks.

People are living longer. An ever lengthening lifespan means your money needs to last longer. More stocks in the portfolio generally results in faster growth and greater wealth, although often accompanied by a bumpier ride. Explains Morningstar, “without sufficient growth, retirees are at a higher risk of outliving their assets.”

Additionally, a prolonged multi-year climate of low interest rates made bonds less attractive investments compared to stocks. As stocks continued to trounce bond returns, fund managers and individual investors weighted portfolios more heavily toward stocks.

Of course, some investors naively direct their money to whatever investment category has done best in the recent past. As warned in the ubiquitous disclosure past performance does not guarantee future results, this can prove to be a foolish and disappointing strategy.

But are we putting too much in stocks?

While stocks tend to deliver higher returns than bonds, they also offer up more variability of returns, or risk. In simple terms, when they go up, they go up more, but when they go down, they usually go down more as well. Not every investor can sit calmly on the sidelines watching portfolio values tank when stocks take a beating, especially as they near retirement age.

Average 401(k) stock allocations for young workers in their 20s are about 87%. That drops to 60% or lower for workers in their 60s, including target-date as well as individual investors. Of course, these are just averages, and individual allocations will vary according to your age, risk tolerance, and growth targets. A very risk-averse investor might shun stocks and stick with conservative money markets and bonds. While this will normally reduce risk, it might also fail to generate the growth he needs. Experienced investors who are comfortable with the ups and downs of the stock market might allocate only a minimal percentage to bonds and plow almost all of their account into domestic and international stocks. They may feel the more extreme ups and downs are worth it in their quest for maximum returns.

So what’s the right answer for you?

The higher stock allocations recommended by today’s more dominant investment managers appear appropriate for today’s longer lifespans and need for growth. In fact, the typical 50-60% stocks, 40-50% bonds allocation used by many retirees is likely a good starting point for your portfolio, as well, with adjustments upward or downward depending on your individual circumstances and the evolving economic outlook.

I have had clients who were perfectly comfortable with only 20-30% of their portfolio in stocks, and others who wanted their entire portfolios devoted to stocks. This is definitely not a case of one size fits all.

While stocks seem likely to outperform bonds in the near future, that doesn’t mean they should take up all the space in your portfolio. Bonds and/or cash provide you with easy access to your money even when the market tanks, and can cushion more violent market swings. Think of them as a form of insurance against bad times.

If you’ve ever panicked, lost sleep, or wanted to sell stocks when the market crashed, heed your own behavioral red flags and set aside a solid portion of your 401(k) for those seemingly stodgy bonds. The next time the stock market plunges, as it inevitably will, you’ll be thankful you did.