In order to get an answer to our question we need to understand Risk and Return.
Greater Risk, Greater Return
Every investment carries risk. In general, the greater the level of risk you’re willing to take, the greater the potential return. Listed below are some simple tools that can help you manage market volatility for your 401(k).
Diversification Helps You Manage Risk
Diversification is the process of spreading your money around within an investment type. Mutual funds and ETFs (Exchange Traded Funds) are automatically diversified. Let’s say you invest your money in a stock fund. That fund may hold stock in many individual companies. Even if a few of those companies do poorly, those losses may be offset by the stocks that perform better than expected. But be aware that diversification does not ensure a profit or protect against loss in a declining market.
Time Smooths Out Risk
Stocks have historically been much riskier than investments like bonds or cash equivalents. But as you can see from the chart below, stocks have historically outperformed other types of investments over time.
If you have many years until retirement, you can usually afford to be more aggressive with your investments because you have more time for your money to recover if your investments fall in value. If you are nearing retirement, you may want to take a more cautious approach by investing in more conservative investments.
Asset Allocation Helps You Manage Risk
Asset allocation is a proven investment strategy for managing risk. It takes diversification one step further by spreading your money over different types of investments, or asset classes. By spreading your money across asset classes, you balance risk because different investments do better
in different market conditions — stocks may thrive while bonds languish, and vice versa. Asset allocation has been shown to account for more than 90% of investment performance.*
Some Funds Do the Work for You
Your plan may offer blended funds that spread the money around for you. These are often called balanced, asset allocation, Target-Date or lifestyle funds. These funds can make it easy for an investor to get the advantages of a balanced portfolio without having to create a personalized asset allocation strategy, however, make sure you have a balanced portfolio and don’t put all your eggs in one basket. Many investors, however, prefer a more hands-on approach to asset allocation. Others prefer to have the guidance of a fiduciary financial advisor to help them with these decisions.
Active Investment Management
Active management is the use of a human element, such as a single manager, co-managers or a team of managers at a wealth management firm, to actively manage a fund’s portfolio. Active managers rely on analytical research, forecasts, and their own judgment and experience in making investment decisions on what investments to buy, hold and sell.
Creating an Asset Allocation Strategy
When you create an asset allocation strategy, you decide how much of your money you want to put into each of the three major asset classes based on your time horizon, investor type, and personal goals. Creating an asset allocation strategy can be done in a few simple steps.
Let’s Talk About Risk.
Subjective risk questionnaires nearly always miss the mark.
This is a number from 1 to 99 (1 is like having cash under your mattress, 99 is like having all of your retirement investments in an aggressive stock).
As a premier 401(k) wealth management firm, CrossPoint Wealth embraces cutting edge technology that pinpoints your acceptable levels of risk and reward with unparalleled accuracy. We help ensure that your portfolio aligns with YOUR investment goals and expectations. Here’s how we do just that.
If you would like to obtain your “Risk Score” for your investment accounts like a 401(k), IRA or other accounts please contact us here info@crosspointwealth.com
Summary:
Your retirement savings plan is a valuable benefit to help you save now so you can have the income you’ll need at retirement.
With any corporate retirement plan, you’re not only investing in your plan, you’re investing in yourself.
We created this helpful guide can so you can potentially make better and smarter investing decisions, but to also protect your 401(k) from market volatility.
* “Does Asset Allocation Policy Explain 40, 90, or 100 Percent of Performance?,” by Roger G. Ibbotson and Paul D. Kaplan, Financial Analysts Journal, vol. 56, no. 1 (January/February 2000):26–33.
