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I have been in a 401k for almost 10 years. When I first started, I didn't know any better so I had most of my money in bond funds because I thought since I had a long time to retirement, I could afford to be conservative (I guess you'd call it a "slow but sure" philosophy). After a year or two I decided I could afford to be risky so I put most of my money into a New Opportunities fund my plan has. My money grew quite well, but thought this was too risky. That is when I discovered the Fool and put everything into the Vanguard 500. Good thing because that is when a lot of funds started to tank (I still lost, but not nearly as much as I could have - I got lucky with the timing when I pulled out - right at the peak. Dumb luck). About 2-3 years ago I finally bought into the idea of Diversification.

I currently have my money in the Vanguard Institutional Index Fund (40%), Vanguard Small Cap (30%), Vanguard Mid Cap (10%), Fidelity Diversified Intl (10%), and Company Stock (10%). These weren't my original allocations, just how the money distributed itself. My company has an agreement with AYCO financial network so I decided to see what they would say about diversification.

My thoughts going in were to cut back on the Small Cap (to 25%), the Company Stock (5%), and add 10% bond fund. I have about 25 years to retirement and thought I should stay away from them, but then thought that combined with a good rebalancing plan, they force you to buy stocks low and sell high.

AYCO uses models based on the "efficient frontier". I don't have the exact numbers handy, but they recommended 20% in foreign stock and 18% in bond funds. They didn't have any mid-cap. The remainder was SC and LC (again, I forget the mix - I have them at work). I thought it was strange that they didn't have mid-cap. The rep said they look at what are called mid-cap funds and lump them with either LC or SC depending on their size.

I was a little skeptical about the allocations because it seems that they are based on past performance, which we are not supposed to do because the past isn't necessarily an indication of the future. I'm still a little skiddish about Internation stocks. I have 10% now (and that was tough to do for me!) and don't see myself ever going above 15%.

I know it took me a long time to get to the question, but what do others think of this allocation and this technique?

One thing I kind of questioned him on was the generic mix. It seems to suggest that all fund types are created equal (e.g. the only International fund we have is the Fidelity one. If I use that, how does that work in their model). We looked up the fund break down and seemed heavily Western European and not much Asian.

We also talked about index vs. SC. We have a SC Vanguard Index fund and the Vanguard Explorer. The rep said for LC, index funds are good, but for SC, managed funds are better. I asked if he had any data (like X% of managed funds beat the SC benchmark). He didn't, but he pulled up the 2 funds I could choose from and the index fund was consistently beating the managed fund.

In case anyone asks, I don't have any REIT's because they are not offered. I recenlty opened an IRA with Vanguard and they have a minimum of $3000 for most of the funds. I was able to go with the STAR fund for $1000 and have been adding to it. I'll be at $3000 shortly and will then get into a REIT fund (I was a 100% 401k person until last year and finally realized I should be in a ROTH. My company matches the first 6% (it isn't all 1-1, so it "only" totals 4%). I have been increasing when I can and am up to 15%. I need to be around 21-22% to max out. I am still contemplating cutting back and putting more into the Roth, but I'm not there yet.

I think I only asked a couple of questions, but if anyone has any thoughts on any other of the comments, please feel free to share!

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