5 Signs To Know If Your 401(k) Allocation Is Too Aggressive


One of the most convenient and popular ways to save money for retirement is to have a 401(k) plan. This basic retirement plan allows you to contribute pre-tax dollars to a retirement account and invest in various securities to generate wealth and build a substantial retirement corpus for your non-working years. It is seen as one of the first steps one must take towards building a comfortable retirement life.

However, a 401(k) is an investment portfolio that has securities of different asset classes that react differently to market volatility. Although the risk is inherently a part of the return, the key to managing the risk element is to ensure that you are balancing out the risk in your portfolio with low-risk investments. If you wish to learn which investments to invest in your 401(k) retirement account to build a well-diversified investment portfolio, consult with a professional financial advisor who can advise you on the same.

Let us explore the signs you need to watch out for to see if you have an aggressive 401(k) allocation strategy:

What is an aggressive 401(k) investment portfolio?

An aggressive 401(k) investment portfolio is where a significant chunk of the funds is invested in one asset type, like stocks. A highly aggressive 401(k) portfolio overlooks diversification and instead focuses on investment condensation. Although stocks are a great investment vehicle for long-term gains, their value can fluctuate significantly in the short term. This can be counter-productive for investors approaching their retirement age, since their portfolio may be too exposed to market risks and volatility. An aggressive portfolio means that the constituents of the portfolio are overly sensitive to market changes. An aggressive 401(k) investment portfolio tries to attain extraordinary returns by accepting very high risk. Although the risk is a part-and-parcel of investing to generate wealth, one needs to assess their risk appetite before making asset allocations in their 401(k) portfolio. High risk may be rewarding, but there’s no guarantee of returns. There is also a chance that the move may even backfire.

5 signs to know if your 401(k) investment portfolio is too aggressive

A highly aggressive 401(k) strategy generally has a few red flags that investors must watch out for:

1. You don’t have an emergency corpus

Having ready liquid funds or an emergency corpus is something that you should definitely look into before starting your 401(k) investment journey. Your 401(k) investment portfolio may be deemed highly aggressive if you don’t have a substantial chunk of cash readily available in case of emergencies. For instance, it is wise to keep 12-16 months of your income in a savings account or a liquid fund. The idea is to be able to access this fund whenever you want, depending on your requirement and needs.

If you keep increasing your investment in stocks and mutual funds and have barely any money left as cash surplus, it can leave you in a difficult spot when you need cash. Siphoning all of your funds from your savings account to your 401(k) investment portfolio and watching it grow may look attractive. However, liquidating these assets can have penalties and may take a long while to recover from.

2. You constantly worry about your 401(k) portfolio

If you find yourself constantly worrying about the performance of your 401(k) investment portfolio, it may be an indication of your portfolio being over-aggressive. If you’re wondering why your portfolio is down, it might be the sign of an aggressive portfolio. Market-related volatility goes hand-in-hand with investments – there is no way to avoid it altogether. However, if you are constantly anxious about market downturns, it might mean that you need to make certain adjustments to your portfolio to reduce aggressiveness to some extent.

It is a known fact that stock markets are volatile. However, the strategy of ‘buy-and-hold’ helps investors reap the rewards in the long run, minimizing the need to micromanage and constantly worry about the investment portfolio. It is also important to note that the market trajectory and bond yields over the years have been on an uphill trajectory. Investors need to be confident of their portfolio and should stop stressing about the same.

3. Your portfolio lacks an asset allocation strategy

Asset allocation is a process used to decide what percentage of your corpus is allocated to a specific asset. An asset allocation strategy helps balance exposure to risk and the scope of returns by investing in various asset classes. An ideal asset allocation strategy involves investing in a basket of mixed securities like stocks, bonds, mutual funds, and government securities, amongst other debt products that can help minimize the risk due to high equity exposure.

The lack of a robust asset allocation strategy indicates the likelihood of your 401(k) investment portfolio being too aggressive. With no solid asset allocation strategy in place, you might have an unbalanced portfolio at hand which increases your risk.

However, it is essential to remember that an asset allocation strategy that is too conservative can also do more harm than good. Therefore, it is highly recommended to get in touch with a financial advisor to get the best asset allocation strategy in place that matches your needs.

4. Your 401(k) portfolio is based on impulsive stock-picking decisions

Many investors make impulsive decisions to invest in less than a handful of stocks or dozens of different stocks. Some people choose to limit their investments by focusing on a few stocks based on market gossip/tips, stock trading apps, and already rallying stocks. Many also become emotionally attached to a stock and hold on to the investment for years despite losses. Putting all your eggs in a single basket may not only negatively impact your returns but may also cause you to make rash investment decisions. This is also one of the classic signs of an aggressive 401(k) strategy.

5. You’ve opted for trading instead of investing

If you are constantly trading instead of developing healthy investment practices, it may mean that your 401(k) portfolio is too aggressive.

There is a stark difference in trader and investor mentality. While a long-term investment strategy focuses on buying a stock and holding on to it, trading is mainly used for short-term purposes. Trading is not only riskier than investing, but it can also lead to huge losses for novice investors. Additionally, the cost of tax compliance can be extremely high for short-term trades.

What are the disadvantages of having a highly aggressive 401(k) investment portfolio?

One of the most significant disadvantages of having a highly aggressive portfolio is that the quantum of your retirement corpus will keep on fluctuating. If you are inching closer to retirement, this can not only burn a hole in your pocket but also cause high stress.

There is also a factor of high risk associated with an aggressive 401(k) portfolio, especially if it is not well-diversified. Since the risk element increases, the possibility of incurring  losses also increases. It is essential to have a financial advisor on board to help you make the most out of your funds while keeping the risk in check.

What to do if your 401(k) portfolio is too aggressive?

Here are 5 steps you can take if you feel that your 401(k) portfolio is over-aggressive:

1.Create a customized plan with a financial advisor:

If you feel that your investments are haywire and all over the place, speak to a financial advisor who can help you focus your asset allocation strategy and help diversify your risk to ensure you are not overly exposed to a particular asset.

2. Reduce risk:

To counter the aggressiveness of the portfolio, you will first have to bring the risk down. This can be done by reducing some stock exposure, diverting funds into debt instruments, or even some cash.

3. Make the best use of market correction:

Take the opportunity to shift to stocks if your portfolio consists only of debt instruments or mutual funds.

4. Use a target-date fund:

Considered ideal for investors approaching retirement; these funds automatically shift money from stocks to bonds as the fund nears its target date.

5. Have a solid asset allocation strategy:

Diversify the funds into various assets to mitigate risk. Additionally, practice annual rebalancing to manage the aggressiveness of the portfolio.

To conclude

An aggressive 401(k) portfolio may seem like the best choice to get higher returns. But on the contrary, it is one of the riskiest moves that can chip away at your retirement corpus. That being said, having a conservative 401(k) portfolio too is not the best way to create wealth for retirement. You need a carefully balanced strategy that mitigates risk, but not at the cost of earning high returns.