Retirement plan decisions made easy
Drill Down: Understanding Your Risk Tolerance
Begin by determining your tolerance for risk. This depends partly on your own psychological makeup and partly on how many years you have before you need to use some of your money. Your risk level will determine how you should split your investments between stocks and bonds.
Place yourself into one of three categories:
Aggressive: I’m in the upper third of willingness to take risk. I don’t mind playing poker for money. I’m optimistic about the long run. If I have a bad result, I can shrug it off and keep going.
Moderate: I’m in the middle third of willingness to take risk. I can have fun buying a lottery ticket, but I’d never spend much money gambling. If I lose money in an investment it shakes me up, but I try not to over-react.
Cautious: I’m in the lower third of willingness to take risk. Playing poker or slot machines for money makes me uncomfortable, even for small stakes that I can afford to lose. I worry about a lot of things in my life, including family and work.
Now think about how many years you have until you’ll withdraw money from your 401k plan. Given your risk tolerance and your time horizon (the amount of time until you will take out money), we can create the following table to show how much of your portfolio should be in stocks. Put the rest in bonds.
These are suggested guidelines that you can adjust. For example, if you have a lot of money outside your 401k, you can afford to take less risk. If you think you lean more toward the risk-taking side of moderate, find the asset allocation for a moderate risk-taker and bump it up by five or ten percentage points.
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Lesson 1: What the Heck is a 401k, and What’s So Great About It?
Lesson 2: Contributions to Your 401k
Lesson 3: Investments “Cook Book” Approach
» Lesson 4: Investments: How Investments Work
Lesson 5: Loans and Hardship Withdrawals from Your 401k
Lesson 9: Your 401k, Your Other Assets, and Your Life
The 401k ebook is available in text, audio, and video formats. The current selected format is audio. You may also switch to the text or video formats by clicking on the icons at the top of the main lesson page.