How Reallocating Your Own Stock Portfolio Can Save You Thousands

Conventional wisdom tells us that one of the most important things to do as an investor is to adjust your portfolio as you age and get near retirement. Ideally, your investments will become more conservative with time. In your younger years, the focus should be on growing your money with stocks. It may come with more risk, but the rewards are often worth it -- and likely necessary.

As you get closer to retirement, you don't want to stop trying to grow your money altogether, but you do want to shift your focus to preserving the money you've made up to that point. This means lessening your stake in stocks and upping your stake in bonds and cash. You don't want too much of your savings in stocks too close to retirement because you don't have as much time to rebound from down periods in the market.

For some people, the last thing they want to do is reallocate their investments by themselves. That's where target date funds come into play. Target date funds are based on your projected retirement and automatically reallocate to become more conservative as you get closer to retirement. And while taking this hands-off approach may sound ideal, it comes with a hefty price tag.

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Target date funds aren't cheap

Since target date funds reallocate your holdings for you, they're actively managed and typically more expensive than index funds. According to Morningstar's Target Date Landscape report, the average expense ratio for target date funds at the end of 2021 was 0.34%. This might not seem like a lot on paper, but over time, it matters more than you may realize.

Let's compare the difference in value between a 0.34% expense ratio and a 0.17% expense ratio on an account if you were to contribute $500 monthly for 25 years, averaging 8% annual returns.

Data source: Author calculations

By just cutting the fees in half -- which is doable even if you hold about four low-cost index funds -- you saved over $10,000 in fees over 25 years. If your returns were higher over that span, the gap in fees would be even greater.

You can do it yourself

There are generally four types of index funds you need for a well-rounded retirement stock portfolio: large cap, mid cap, small cap, and international. With those four, you cover all of your bases: You get the stability of larger-cap stocks and the upside potential of smaller-cap stocks, along with non-U.S. exposure.

Here are approximate allocations you can use as a guideline, adjusting for your age and risk tolerance accordingly,

30s and younger

Portfolio: Stocks (100%), bonds (0%), cash (0%)

Stock breakdown: Large cap (50%), mid cap (15%), small cap (15%), international (20%)

40s to early 50s

Portfolio: Stocks (90%), bonds (10%), cash (0%)

Stock breakdown: Large cap (60%), mid cap (10%), small cap (10%), international (20%)

Mid-50s to retirement

Portfolio: Stocks (50%), bonds (30%), cash (20%)

Stock breakdown: Large cap (70%), mid cap (5%), small cap (5%), international (20%)

Do what makes you comfortable

You may decide you'd rather pay target date funds' higher fees instead of having to worry about reallocating your portfolio yourself. That's perfectly fine. There's a reason target date funds exist and are increasingly becoming more popular: They get the job done for a lot of people.

You don't want to do anything that makes you uncomfortable, but you should also understand that it's not as hard or time consuming as it may seem. If you're dealing with your 401(k), it's as simple as changing a few percentages in your elections. If you're dealing with a brokerage account, put your investments into one of the four broad categories, see how much you have invested in each, and adjust your new contributions accordingly to get to your ideal allocation.

With less than an hour's time every few years (and even that's fairly frequent), you can do the same thing a target date fund does -- and potentially save yourself thousands.