3 ways to know if your 401(k) is too aggressive – Minneapolis Star Tribune

A 401(k) retirement plan is one of the most popular ways to save money for retirement and score some tax breaks for doing so. But often these plans don’t provide a lot of guidance on how to manage them, and participants end up with wildly aggressive portfolios or a portfolio so conservative that it barely budges year after year.

When experts speak of being aggressive, they generally mean how much of your assets are in stocks or stock funds.

To reduce risk, investors can add more bond funds to their portfolio or even hold some CDs.

But many workers make the opposite mistake: not investing aggressively enough. If you have more than five years until retirement, and certainly if you have 10 or more, you can afford to be more aggressive.

If you think your portfolio might be too aggressive, here are some signs to look for.

1. Your account balance fluctuates a lot

It can be exciting to see your balance run up quickly, but it’s important to realize that this could be an effect of a 401(k) that’s invested too heavily in stock funds and not enough in safer alternatives. Fast gains from stock performance “will feel great when things are going up, but that investor needs to be prepared to see some significant paper losses when we experience a downturn,”

said Matthew Trujillo, CFP at Center for Financial Planning in Southfield, Mich.

2. You worry a lot about your 401(k)

“If someone tends to move out of their investments because of volatility, then the portfolio is probably too aggressive for them,” said Randy Carver, president and CEO at Carver Financial Services in the Cleveland area.

But it’s key to understand that while stocks are more volatile, they are also one of the best ways to increase your wealth over time.

3. You need cash soon, but your 401(k) doesn’t have any

If you know you’re going to need cash in the next few years, your 401(k) needs to be factoring that in. That doesn’t mean you need to sell everything and go to cash now, but you can leave new contributions in cash or move them into lower-risk bond funds.

To gauge your plan’s aggressiveness, use the rule of 100, said Chris Keller, partner at Kingman Financial Group in San Antonio. With this rule, you subtract your age from 100 to find your allocation to stock funds. For example, a 30-year-old would put 70% of a 401(k) in stocks. Naturally, this rule moves the 401(k) to become less risky as you approach retirement.

Pointing to the importance of a 70-year-old reducing risk, Keller said, “Losing half of your portfolio while at this age might have a huge impact on what your retirement looks like.”