Barton18 writes:

I'm wondering how I should best invest the money I'm putting into a 401(k) plan at work. I would like to put it into a S&P 500 index fund, but the plan doesn't offer one. What it does offer is a number of mutual funds from the Columbia Funds family, ranging from a money-market fund to a U.S. government bond fund to a small-cap stock fund. One theory I've read is that you should subtract your age from 100, invest that percentage in stocks, and the rest in bonds and/or cash. I'm 28, so following that approach would mean I should have 72% of the 401 (k) money invested in stock funds. If anyone out there has thoughts on how someone my age should allocate money in a 401(k) plan, I'm interested in hearing your ideas.

I reply:

If it were my money (but of course, it's not), I'd invest every penny that I don't expect to need within the next 5-10 years in stocks. For a 28-year-old in a 401(k) plan, of course, that's all of it. Over that period of time, I expect with very high confidence that stocks will outperform all other investments. Since (by hypothesis) I can afford to ride out the inevitable volatility, I want all my money going for the best possible long-term returns. Over shorter periods of time, my confidence level is not so high; therefore, money that I will need sooner (whether 2%, 28%, or 100% of my holdings) goes into less volatile investments -- primarily double tax-free money markets.

By the way, I suspect this is an unnecessarily conservative treatment of my medium-term (1-5 years) money. Does anyone have better ideas? Thanks. --Bob