Background: I'm a young 20-something, I won't be retiring for 40+ years, and the expense ratios for the funds offered in my company's 401(k) plan mostly suck. The company matches 35% of my contributions up to a limit. The plan doesn't offer a large cap fund.

I understand that one of the reasons an all-stock portfolio isn't recommended is because of the volatility, though stocks will provide some of the best long-term returns. Considering my scenario, what drawbacks would I have were I to solely invest in stock-based funds? (going by expense ratios, my only viable choices are Vanguard mid-cap at 0.24% and Vanguard small-cap at 0.30%)

This question appears to be related: If low-cost index funds are considered the best investment, why are there so many high-cost, managed funds?


3 Answers 3


At your age, I don't think its a bad idea to invest entirely in stocks. The concern with stocks is their volatility, and at 40+ years from retirement, volatility does not concern you. Just remember that if you ever want to call upon your 401(k) for anything other than retirement, such as a down payment on a home (which is a qualified distribution that is not subject to early distribution penalties), then you should reconsider your retirement allocations. I would not invest 100% into stocks if I knew I were going to buy a house in five years and needed that money for a down payment.

If your truly saving strictly for a retirement that could occur forty years in the future, first good for you, and second, put it all in an index fund. An S&P index has a ridiculously low expense ratio, and with so many years away from retirement, it gives you an immense amount of flexibility to choose what to do with those funds as your retirement date approaches closer every year.

  • Looks like this answer has been blessed with the JoeTaxpayer Seal of Approval(TM) :). Given my choices listed above, should I split my funds between the two (if so, why is there a benefit?), or should the general strategy be to invest 100% into the fund with the lowest expense ratio?
    – Bigbio2002
    Mar 28, 2013 at 15:12
  • 1
    @Bigbio2002 I meant if I knew your full list of choices I might advise you to go with some of the other ones. Knowing only very limited information on those two, I'd split between the two of them.
    – Kevin
    Mar 28, 2013 at 21:15
  • 2
    I would not ever plan on using a 401k for a house down payment. I do agree with the part of this answer about being find for all stocks, but I don't think a 401k loan is even a remotely good idea. YMMV.
    – enderland
    Mar 29, 2013 at 13:08
  • 4
    @Kevin I guess I'm spoiled by my employer and my experience with Vanguard, because 0.7% seems really high. Apart from an international equity fund with an ER of 0.45%, all of my 401K options are below 0.17% (most are below 0.05%). Your small cap growth fund may have good performance, but 1.25% will eat away a lot of that. Jun 5, 2013 at 20:30
  • 1
    @Kevin: Anything above .1% is high IMO. The biggest Vanguard mutual funds have expense ratios of .04%. Most 401k options are horribly overpriced.
    – Brian
    Feb 13, 2018 at 22:37

The advantage of being young is not that you can take the "safest" path from the beginning instead of catching it up mid-life, the real advantage is that you have plenty of time to recover from your errors.

The investment goes the same way.

Your investment has a lot of time, so it has a lot of time to recover from the swings of the stock-market.

You can take the "risky" all stocks fund.


I've read a nice rule of thumb somewhere that you should consider:

You should invest (100-YOURAGE)% of your money in stock

The rest should be something less volatile and more liquid, so you have some money when the stock market goes down and you need some money nevertheless.

So you would start with buying about 75% stock and balance your stock percentage over time by buing more secure assets to keep the stock percentage at the desired level. At some time you might need to sell stock to rebalance and invest in more secure assets.

Note: That's a general rule of investment and doesn't consider 401(k) laws like restrictions on getting the money before retirement. In case the 401(k) money is locked up, you can put the 401(k) money in stocks and have the non-stocks part of your strategy outside of 401(k) at the beginning. As you age you would most likely need to rebalance your 401(k) money to include non-stock as well to achieve the lower stock ratio suggested for higher age.

  • 4
    This is silly advice for someone early in their career. Over 40 years the stock market will beat bonds handsomely. The bond part of the portfolio is just a useless drag since he is so far from retirement.
    – zeta-band
    Nov 8, 2017 at 18:15
  • 1
    Someone early in their career will end up with ~75% stock. This rule of thumb takes into account that one might very well need some extra money before retiring - e.g. buying a house or emergency situations that need accessible money. Also it helps to stay on track with the investing plan - if you got all stocks and the stocks go badly for the first 5 years one might get very nervous when you have 100% stocks. It is however a rule of thumb and only a starting point for a custom strategy. Nov 28, 2017 at 10:01
  • 1
    If you are going to need money for a house, you shouldn't be investing it in your 401K at all. And you most definitely shouldn't be using your 401K as your emergency fund.
    – Kevin
    Feb 14, 2018 at 15:26
  • 1
    I'm german so I don't have any clue about 401k. I've included a note to reflect that and outline how that should be taken in consideration. In case you know more about 401k and can enhance the answer go for it - thanks for your comment. Feb 15, 2018 at 12:05
  • 2
    @Fattie Nope. That formula is a common one and not hideously bad for someone in mid life, but for a young person it is needlessly conservative.
    – zeta-band
    Feb 15, 2018 at 16:26

You must log in to answer this question.

Not the answer you're looking for? Browse other questions tagged .