Personal Finance

I'm 39 with $600k in my 401(k) - is a 25% allocation to bonds too conservative given my goals?

Joey Frenette

Published: January 26, 2025 11:56 am

Hitting the right asset allocation (stocks versus bonds) can be a tough balance to achieve if you don’t fully understand your risk profile. It’s not just your age or ability to take risks that counts; your willingness to take risks and your attitude toward the risk/reward trade-off can also play a major role.

Indeed, if you’ve lived through the 2008 stock market crash or the dot-com bust of 2000-01, odds are you’re probably a bit more conservative than those who haven’t lived through such vicious periods for the broad stock market. For many of today’s young people, the 2020 stock market crash, which saw a very speedy V-shaped recovery, was the worst we’ve seen in our investment lifetimes.

While we may have been around during the 2000 and 2008 market meltdowns, we probably weren’t old enough to be invested and know what it was like to see share prices plummet week after week. As a result, many Millennials (and those younger) may have a false sense of their risk tolerance. Just because they’re young and willing to endure another market hailstorm doesn’t mean they’ll know how painful it really is to see your portfolio lose as much (or even a bit more) than half of its value from peak to trough.

Finding the right asset allocation is a self-discovery process

Of course, there are stories of past crashes that we’re sure to be reminded of from time to time. You know all those negative headlines, forecasts, and red flags waved by the bears? Many of them tend to compare the present environment to one of the historically nasty ones (2008, 2000, or even 1929). They’re worth studying to better understand what could happen in bear-case scenarios. However, it’s tough to tell how you’ll react in the face of a crisis until it actually happens.

That’s why it’s wise for young people to allocate a portion of their portfolio to bonds, CDs, precious metals, cash, and cash equivalents. I’d include Bitcoin had it not followed in the footsteps of stocks. In many ways, it’s a high-beta play that’s to be treated more as a tech stock than digital gold!

The curious case of a 39-year-old investor who’s 25% in bonds

In the case of this older Millennial Reddit poster, 39, who’s 25% allocated to bonds, they’re wondering if they’re too conservatively positioned with their 401(k). Indeed, after the last two years of S&P 500 gains, we’ve been treated to, it’s easy to regret one’s bond exposure—no matter how large! 

According to a common rule of thumb, which states you should own “your age’s percent” in bonds, 25% may actually be a tad on the aggressive side for the 39-year-old. However, if you go by the “rule of 120,” which suggests subtracting your age from 120 to get your stock allocation, the 39-year-old should be 81% allocated to stocks. This suggests they’re a tad (but not excessively so) conservative.

If their tolerance for risk is high (check in with a financial advisor), I do think they may be just a bit conservative, given their ambitious goal of hitting a $5 million net worth in 10 years.

The bottom line

Undoubtedly, life happens. And they’ve got to be prepared for financial expenses along the way that could derail their path to $5 million. In any case, with $600,000 invested, I think skewing slightly towards the “rule of 120” with an allocation closer to 19% bonds (and 81% stocks) can make a lot of sense.

Of course, check in with an advisor before making the move! As mentioned previously, the ability and willingness to take risks are not the same! Additionally, asset allocation is perhaps the most important determining factor in the size of nest egg you’ll end up with come retirement.

In any case, one doesn’t have to shift their allocation in one instance. It can be very gradual. Perhaps upping the stock exposure on market dips can make sense over the coming year.