Suggestion of a portfolio for a friend - who didn't invest

[Jacinle]

Hi

Recently I had a chat with 2 friends separately, one is a physician and one is a software engineer.  Both are debt free except mortgage and both just didn't select any investment in their DC pension plan , and it is just idle as cash by default(or money market I think!)

In comparison my pension is almost twice bigger for the same amount of input as I have 70% stock  30% bond allocation.  We are in early forties, so almost 2 decades of work and time for the investment to grow

They asked me how the allocation should be. 
Any suggestions for risk averse individual and people that don't want to learn investment?  Like 50/50 international stock/bond? 
Should they switch their lumpsum or dollar average over the year into the new allocation?
Both plan to work at least a decade.

Thank you!

[MustacheAndaHalf]

Most retirement portfolios have less than 50% bonds, so it's overly conservative for someone who is still working.  If they've ignored their balance this long, maybe they can switch to some stock investments and mostly ignore it?

I think I'd go with 70% (same as yours) S&P 500 index fund, partly for the name brand.  If they know "S&P 500" means indexing, and matches the market, that can make it easier for them to understand and stick with the investment.  They can also say "S&P 500" to others, and hopefully others understand it's a good idea.  Maybe they can leave the other 30% in cash, so the only change they make is 70% S&P 500.

My recommendation is very different in this case versus other situations, because those two friends will have to take a single piece of advice and run with it for months or years.  So "S&P 500, with the same 70% as me" [meaning your allocation] would be my suggestion to your friends.

[Bearded Pharmacist]

100% stocks.

[Morning Glory]

What country are you in?

[FLBiker]

If they're risk averse, 90/10 (or 100% stock) is probably not right (even though it's what I do).  I'd probably take advantage of this as a teachable moment.  In <30 minutes, you should be able to explain the basics of asset allocation, and have them pick a ratio.  I'd certainly try to steer them away from anything higher than 30% bond (and, honestly, even that seems high to me).  It might be good to show them historical returns?

[Financial.Velociraptor]

Does the employer have a "target date" set of funds that slowly increase bond allocation as retirement date approaches?   Would be a good time to show them research on the 'bond tent' approach.

[Wintergreen78]

I agree with the dinosaur. Target date funds are perfect for people who don’t want to think about it. As long as the fund fees are fairly low and they don’t have huge amounts of turn-over they are pretty good.

You can argue all day about how to optimize things if you like to do thus stuff yourself (isn’t that basically what this forum is?), but for normal people who have zero interest in this, target date funds are awesome. You just make one decision at one time, then make your contributions each paycheck and don’t think about it again. They are a massive improvement over leaving everything in cash.

The cash account in my 457 plan from my last job had a guaranteed return of 4% for years (it just dropped to 3.5% this year). Multiple people in my office talked about putting everything there because it was the “safe” choice, so I think it is a pretty common approach. It would be interesting to see what percentage of DC funds just sit in cash.

[NorCal]

I'll second the target date option.

If they want to be thoughtful about it, here's my recommendation for new investors.  Remember that risk tolerance is an individual decision that no algorithm can replicate.

Ask them to understand that the stock market will go both up and down over their investing lifetimes.  Ask them how much they are willing to lose in a downturn, and to be honest about it.  After they give you that answer, take the assumption that the market will lose 50% in a downturn, and back into their tolerable losses.

For example, if they have a $100K portfolio, and tell you they're willing to lose $30K, they should have a 60% allocation to stocks.

I also recommend adding 10 percentage points to the bond allocation if they haven't invested through a downturn before.  Most people's risk tolerance is much lower than they actually think it is.  This is why they make the destructive decision to sell into a downturn.  I know this from my personal experience (and my friends) who starting their investing journey around 2007.

It's WAY better to invest conservatively to start if it helps avoid expensive mistakes later.