Do You Know How Much Money Your 401(k) Could Lose This Year?
In other words, I’m asking, “Do you know your risk?”
But I didn’t ask it that way because I know that, for a lot of people, risk is this abstract, distant, otherworldly life force. They know it has an effect on their portfolio, but not to what extent or—in all reality—how.
Tell me if this scenario resonates with you.
You are stuffed in a room with 100 or so of your coworkers of all ages. A well-dressed financial rep enters the room. He’s here to talk about your 401(k).
Speaking in generalities, he outlines 5 different portfolios from conservative to aggressive: “If you’re a riskier person, you might want to go with the more aggressive portfolio. If you’re more careful or getting ready to retire, you might want to go with one of these more conservative ones.”
After a good amount of explanation, he asks you to choose. So you do…kind of haphazardly. You pick one that you think matches your risk tolerance, or maybe you pick one considered to be “middle of the road”. You’re not sure what you got yourself into, but…hey…how bad can it possibly be?
Of course, this scenario plays out in a lot of different ways. But, from my 19 years of experience, it’s typical. The only problem is, it doesn’t reveal what’s really important to you: how much money you could lose or gain. You don’t really understand. You just choose, and risk remains some abstract, otherworldly concept.
So let’s get it back into orbit. In fact, let’s land it right in your neighborhood with some meat and bones substance. Do you remember which of those 5 portfolios you chose?
Well…here they are, demystified, showing you in-the-ballpark figures for how much you could stand to lose and gain in a given year:
- Conservative (33 risk score): -10% or +20%
- Moderately Conservative (47 risk score): -18% or +32%
- Moderate (59 risk score): -24% or +40%
- Moderately Aggressive (68 risk score): -28% or +46%
- Aggressive (72 risk score): -32% or + 48%
Note: Risk Scores are based on a scale of 1-100 with 100 being the most aggressive.
They might have slight variance in risk scores, percentages, and names from company to company. Your particular portfolio may be a bit different, but this is the typical landscape of the 401(k) options offered to you.
This means that—with a $100,000 401(k)—you could stand to lose $32,000 with the aggressive option, $24,000 with the moderate option, and $10,000 with the conservative. All in one year.
In light of what you chose, how does that make you feel?
If you are comfortable with the loss and gain, you made a good choice. If you’re scared, you didn’t, and you need someone to make adjustments so your portfolio matches your risk tolerance. Simple, right?
You have just experienced a wonderful taste of a personalized risk analysis.
This is what I do with my clients. I sit them down. I analyze their portfolio. I tell them what percentage they could lose or gain in a year. And then I ask a very important, very telling question: “If you were to lose (insert dollar amount of potential loss here), would you be comfortable with that?”
They have one of three reactions:
- “Oh no, that’s way too much.”
- “Yes, I’m comfortable with that.”
- “Yes, and I would be comfortable with more loss if it means more gain.”
In my practice, working mostly with soon-to-be retirees, I usually get the first reaction the most. And for good reason too! People who will be retiring soon should have a conservative portfolio. They shouldn’t invest aggressively like a 25 year-old because they just don’t have the time to make up for losses.
But if they never check the risk of their portfolio, they will never make those necessary adjustments. And when the economy takes a turn for the worse (eventually it will), they could lose one-third of their money when they need it most. They might even make a fear-based decision to pull their money out, locking them into those losses for good.
I don’t usually show so much urgency, but I know how important it is. I’m not going to knock down your door, but I will implore you now.
Don’t let this be you.
Need a personalized risk analysis at no cost to you? Call Seniormark at 937-492-8800 for a free consultation.
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