Either way, you also need to take your risk tolerance into account. If you're saving for retirement in 2035 but can't stop sobbing about your losses, you'll simply have to put less money into stocks and more into bonds.
If you're not sure where to begin, several mutual fund companies, such as Vanguard, Fidelity and T. Rowe Price, offer asset-allocation programs online. Financial Engines (www.financialengines.com) and Morningstar (www.morningstar.com) offer relatively low-price, computer-driven guidance. And you also could consult a financial planner to help you put together an asset allocation. You can find fee-only financial planners in your area from the National Association of Personal Financial Advisors at www.napfa.org.
•Rebalance your portfolio. Rebalancing means that you sell shares of your top-performing funds and buy shares of your losing funds until you get back to your target asset allocation.
If you rebalance only when your portfolio is seriously out of whack — as it probably is now — you can reduce your risk and modestly improve your returns. A mix of stocks and bonds is a remarkably self-balancing mechanism. Stocks usually rise when bonds fall, and vice versa. If you rebalance when your portfolio is 10 percentage points out of whack, you'll usually be selling high and buying low.
Using the 10-percentage-point rule, you would have rebalanced three times in the past decade: Once in October 2002, once in January 2007 and once in November 2008.
"I rebalanced about mid-December, selling some of my bond holdings and buying more of my stock fund holdings," says Dan Cobb of Soddy-Daisy, Tenn. "I don't think I sold bonds really high, but I certainly bought stocks low."
Rebalancing isn't a panacea. If you rebalance too frequently, you'll actually reduce your returns. On Wall Street, you're supposed to trim your losers and let your winners run. Rebalance too often, and you'll be selling your winners too early.
•Invest more. The only sure-fire way to get your balances back up quickly is to save more. If you're a 401(k) investor, the increase in savings might not hurt your salary as much as you think. Suppose you take home $5,000 a month in gross pay. If you bump up your contribution from 4% of pay to 5%, you'll decrease your monthly check by just $43, according to Bankrate.com.
The reason: You're paying in pretax dollars, and each dollar you save goes straight to savings. If you were investing in a taxable account and were in the 25% tax bracket, you'd have to earn $1.33 to save $1 after taxes.
The payoff from bumping up your contributions now can be big. Assuming you earned 6% a year on your contributions and your salary stayed at $5,000 a month, you'd have $202,000 in your account if you contributed 4% of your salary for 30 years. At 5%: $252,000.
•Pay less. Any money you pay to someone else is money you won't have when you retire, so look for funds with low expenses. It can make a big difference in the long run. Consider two funds: Expensive Fund, which charges 1.5% a year, and Cheapo Fund, which charges 0.75% a year. Both funds earn 8% a year before expenses.
Invest $10,000 in Expensive Fund A, and you'll have $66,144 in 30 years. Invest $10,000 in Cheapo Fund B, and you'll have $81,643. Simply by investing in a low-cost fund, you've boosted your return by 28%.