Date: August 29, 2022

Is Your 401(k) Taking on Too Much Risk?

People may envision themselves sitting on a beach and sipping Mai Tais when they think of retirement. This isn’t a bad image, but it isn’t complete—unless you have a plan to fund your golden-years income.

I know what you’re thinking: “Retirement? Who cares about that? It’s so far away.” The problem is that if your 401(k) isn’t reviewed often enough, your future income could be significantly less than you are expecting to live on. So, let’s explore why it’s important to have some downside protection and how you can manage risk.

This article addresses these questions and more:

  • How do you know if you have too much risk?
  • When should you re-evaluate your risk tolerance?
  • What can your investable assets’ performance tell you?
  • Should you change your 401(k) plan options?
  • Why is panic-selling generally a bad idea?


What Does “Too Much Risk” Mean?

Risk is the possibility of losing money. It’s a part of investing, and it isn’t necessarily a bad thing.

However, the word “risk” isn’t always used to describe negative outcomes. For example, when discussing volatility, you might hear people say that a specific investment was “volatile” or had a lot of “upside risk.” 

These terms mean that there was a high probability that the price would go up or down quickly in response to market changes. However, they don’t refer to whether your investment would lose value.  

Re-Evaluate Your Risk Tolerance

Once you know your risk tolerance, it may be time to re-evaluate that figure, should your circumstances change. If you lose a job or experience another major life event that affects your finances, for example, this can require an adjustment in the amount of risk you can afford to take on.

It might be wise to review your allocation, as well. When you’re younger and think you’ll need more money to retire, you may want to add more stock-based investments. Meanwhile, as you get older, it’s a good idea to make sure that your investment portfolio is not taking on too much risk. 

You can do this by adding more bonds or shorter-term instruments (or both). If possible, consider adding alternative assets, like real estate, if that fits your goals and time horizon.


How To Know if Your 401(k) Plan Has Too Much Risk

Overall, the first step to take is looking at your 401(k) plan’s investment options. Every provider offers a variety of funds and asset classes. However, you should have a general idea of how much risk your portfolio is taking on. 

If you have more than one fund in your account that invests in stocks, for example, check their allocation among large-, mid-, and small-cap equities. Additionally, review their growth versus value stocks. To get a more comprehensive understanding, look at the overall weightings within each category.

Also, it’s important to know how well these investments have performed over time, how volatile they’ve been, and what kind of returns you can expect if things go wrong. This will also let you see whether certain funds outperformed others in certain market environments.

Another factor to consider when determining if your 401(k) has too much risk is your age: younger investors may be better off with higher exposure to equities because they have more time to recover from bear markets. Over the long term, history has proven that U.S. stocks generate the strongest returns for those who can tolerate the risk.

On the other hand, older investors might prefer lower allocations to equities since their retirement horizon isn’t as far away, and they potentially have less time to recover. 


What Can Changing 401(k) Plan Options Mean for My Retirement?

Unfortunately, the market has been noticeably volatile in recent months. This can compel financial advisors to shift their 401(k) plan options accordingly. The reason why is because they want you to be diversified in your investments (and thereby at reduced risk) by spreading out your money across multiple investment opportunities. 

As a result, if one particular investment loses value and another gains, then it’s logical for an advisor to move some of your money from the losing investment into the winning one. This helps keep your portfolio more balanced. On the other hand, despite their best efforts at diversification, they may feel compelled by their fiduciary duty to guide you towards what they believe is best for your retirement fund.

In other words, when there are problems with certain sectors of the economy, they may decide that it would be better if you were invested solely within different sectors instead of just specific companies within those sectors. 


Learn How We Help Clients Safeguard a Retirement Worth Looking Forward To.


How Can I Make Sure My 401(k) Is Protected From These Risks?

If you feel that your 401(k) portfolio is too risky, take a deep breath: there are several steps that we can take to make sure that your investments are positioned properly—and working for you instead of against you.

  • Avoid selling all of your investments. Selling 100% of your investments because of a market decline is likely to result in a loss from an emotional mistake. Worse yet, you have locked in that loss without any plan for reinvesting. 
  • Consider changes to your portfolio carefully. If we need to adjust your allocation, we certainly will. However, no one makes their best decisions in a panic. Dramatic news reports have been known to spook unwary investors down a path where they wound up worse off than they were. 


Protect Your Retirement Savings & Assets

Protecting Your Savings - Banking And Assurance Concept - Hands Over Piggybank With Money Stacks

Achieving your retirement goals requires careful management of your exposure to risk. This can mean taking on some degree, but never so much that it outweighs your potential rewards. The key is diversification: spreading your investments across different types of assets and strategies so that gains in another can offset losses in one area.

The best way to do this is by keeping a close eye on what measurable risks are at play in the market today. At the same time, we consider how those risks might affect your portfolio over time. For example, if interest rates rise faster than expected and bonds fall; as a result, bond holdings could lose value more quickly than other asset classes like stocks.

So, it would make sense for someone who wants low volatility (but still some growth) from their bond portfolio to keep their risk exposure at a reasonable level. Placing limits on positions like this ahead of time, rather than reacting negatively when market events occur, allows us to take advantage of opportunities, limit losses, and minimize worst-case potential damage.


Rely on Your Financial Ally

The first step in protecting your retirement is re-evaluating your risk tolerance and making sure to invest in funds that match your preferences. Next, we can review the funds available in your plan to ensure they’re still the right fit, considering how much risk they take on.

Finally, it may be time for an investment switch from stocks to bonds or cash investments. Heritage Capital, LLC has the retirement planning you need and more. Contact us for financial planning for high-net-worth individuals, get a second opinion in New Haven, or get financial help getting back on your feet after divorce.

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Paul Schatz, President, Heritage Capital