Five Ways to Manage Risk in Your Retirement Savings Plan

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Your employer-sponsored retirement savings plan is a convenient way to help you accumulate money for retirement. However, choosing to participate is just the first step. Another key to making it work is managing risk in your portfolio.

Below are 5 ways to tackle this important task.

  1. Know your personal risk tolerance

All investments come with some level of risk, so it’s important to be aware of how much volatility you can comfortably withstand before choosing investments.

Start by reflecting on a series of questions:

  • How well would you sleep at night knowing your retirement portfolio dropped 5%, 10% or 20%?
  • How much time do you have until you will need the money? Typically, the longer your time horizon, the more you may be able to hold steady during short-term downturns in pursuit of longer-term goals.
  • Do you have savings and investments outside of your plan, including an emergency savings account?

You plan’s educational materials may offer worksheets and other tools to help you gauge your own risk tolerance.

  1. Develop a target asset allocation

Develop an asset allocation mix that is suitable for your savings goal while taking your risk tolerance into consideration. Asset allocation is the process of dividing your investment dollars among the various asset categories offered in your plan, generally stocks, bonds, and cash/stable value investments. If you’re a young investor with a high tolerance for risk, you might choose an allocation composed heavily of stocks. If retirement is less than 10 years away and you fear losing money, your allocation might lean toward bonds and cash investments.

  1. Diversify

Even the most aggressive investor can benefit from diversification, which means not putting all your eggs in one basket. Consider a healthy mix of stocks, bonds and cash to help balance any losses that may occur in the stock portion. Within the stock allocation, you may want to diversify among different types of stocks, such as domestic, international, growth, and value.

  1. Understand dollar cost averaging

When you contribute to your plan, you likely contribute an equal dollar amount each pay period, which then purchases shares of the investments you have selected. This process — investing a fixed dollar amount at regular intervals — is dollar cost averaging (DCA). As the prices of investments you purchase rise and fall over time, take advantage of the swings by buying fewer shares when prices are high and more shares when prices are low.

DCA involves continuous investment in securities regardless of their price. As you consider the benefits of DCA, also consider your ability to make purchases through extended periods of low or falling prices.

  1. Perform regular maintenance

Review your portfolio at least once per year and as major life events occur. Determine if your risk tolerance has changed and check your asset allocation to determine whether it’s still on track. You may want to rebalance to bring your allocation back in line with your target, or make other changes to keep your portfolio in line with your changing circumstances.

 Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2016.

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