Asset Allocation for My 401K Account

Deciding an asset mix has to do with one's tolerance of risk.

I've decided to max out my company traditional 401k for the year 2008. This means most of the money I'm going to put to investment will go to this account this year. Surely I want to play safe. But I don't want to have a bland year either. So I came up with a three level mix of which the first two levels being conservative and the third level being aggressive.

1st Level		Target
	U.S. Stocks	65%
	Foreign Stocks	25%
	Bonds/Cash/Others	10%
	Total	100%

Though I think the foreign market will perform better in the coming and next 3-5 years. Our recent market turbulence showed that U.S. market still leads the rest of the world. So I settle 25% on foreign stocks. Next, I set a mix target regarding to the market caps:

2nd level	Giant/Large	55%
	Mid	25%
	Small/Micro	10%
	Total	90%

Mid and small caps usually generate more returns over time but have more fluctuations and risks as well. With 35% in mid and small caps, plus a 10% in bond and cash, I feel pretty comfortable in terms of both risks and potential returns. Next, I want to make sure the non-foreign part has a reasonable mix regarding to the market caps as well:

3nd level_non-foreign	Giant/Large	35%
	Mid	20%
	Small/Micro	10%
	Total	65%

As you can see, the proportion of Giant/Large VS. Mid/Small/Micro is close to 1:1. This will hedge the safety net built by the first two levels by increasing more exposure to mid and small companies. When I do my portfolio allocation, I make sure to follow the level ordering of these three targets. This way, it will ensure a conservative solid backbone and the potential to bigger returns as well.

Note: I distinguish Giant and Large (Small and Micro) because Morningstar report this way and I use the data published on their website to conduct portfolio allocation. The actual difference between Giant and Large (Small and Micro) matters little to me.