Is Your 401(k) Investment Portfolio Too Conservative?

Plenty of Americans invest money into 401(k) accounts in order to save for retirement. This popular employer-sponsored retirement option gives you a ton of options, allowing you to invest in everything from value funds to specialized funds to ETFs. But for most people, trying to decide which mix of funds makes for the ideal 401(k) investment portfolio is confusing and complicated.

If you haven’t checked your 401(k) investment choices lately, now is a great time to do so. You need to know if your investments are paying off, if your money is growing as quickly or exponentially as you’d like. If the funds you’ve chosen are too conservative, you could be doing next to nothing with the money you’ve invested.

Here’s why a 401(k) that’s too conservative can be problematic – and how you can tell if yours needs to be more aggressive.

A Safe Portfolio Can Hamper Your Money’s Growth

Making safe investment choices isn’t exactly a bad thing. It’s a sound investment strategy to divvy up your money and your assets into different funds so you have a diversified portfolio. It’s also important to consider your risk tolerance, or how risky you’d like your investments to be.

Riskier investments can pay off significantly. If they perform well, you can reap the financial rewards. But taking a risk also means you’re putting yourself in the running to potentially lose a lot of money. Many investors prefer to play it safe with their 401(k) portfolios, investing their money solely in options that offer consistent or predictable returns.

But being too conservative with the money you’re putting into your 401(k) can also be a bad thing. For example, investing the bulk of your 401(k) in bond funds or cash-like alternatives offers safe returns. But the returns are so safe that they barely earn enough to match the inflation rate – which, according to the Federal Reserve, is just 2 percent each year.

Earning just 2 percent on the money you’re stashing away for retirement is an incredibly small amount of growth. In 10 years with a 2 percent return on an investment of $30,000, you’d earn just $6,569. 

However, if you’re willing to invest in slightly riskier funds, you could grow your retirement savings far faster. For example, if you invest in funds that offer a 5 percent return on average, you could earn $18,866 on a $30,000 investment over 10 years. That’s almost triple the interest of the 2 percent conservative funds.

So, if you want to increase your investment earning potential and set yourself up for a successful, financially sound retirement, being too conservative can leave you with too little growth and not enough money.

Look For These Signs to See if Your 401(k) is Too Conservative

Wondering if your 401(k) portfolio is too conservative? If you want to know whether or not you’re reaching your full financial potential, look for the following signs when you assess your current investments.

Your Money Isn’t Increasing

Are you continuing to add money to your 401(k) each time you get a paycheck, but your investments don’t seem to be increasing your funds? This is a serious sign that the investments you’ve chosen aren’t doing anything for you. If your funds aren’t growing over a period of time – experts suggest at least a year or longer to get a long-term performance perspective – you need to make changes to how you’re allocating your money. 

While fluctuations in your money’s performance can happen from month to month or year to year, you should be seeing returns that increase the amount of money you’ve invested. And if that growth isn’t happening, or it isn’t happening quickly enough to help you prepare for retirement, you need to be less conservative.

Most of Your 401(k) is Invested in Bond Funds

Funds are at the core of any 401(k) portfolio. While some 401(k) plans now offer a wider variety of investment options, like ETFs, most are centered around different types of mutual funds. Generally speaking, mutual funds can span from very conservative to somewhat aggressive. However, investing too much of your money into certain types of mutual funds can cause your 401(k) portfolio to become too conservative.

Bond funds are what you need to look out for. According to some financial experts, putting too much of your money in bond funds (or bonds) can lead to little growth and potentially negative long-term investment consequences. Bonds typically have a growth rate of less than 2 percent. That severely limits how your money can grow, and it also limits benefits like compounding interest. The effects of this could affect your 401(k) funds for 20 to 40 years.

You’ve Invested in Money Market Funds

The last hint to look for if you’re worried about your 401(k) is whether or not you’ve invested in money market funds. Like bond funds, money market funds offer very little growth potential, and they’re so conservative that they do almost nothing for your money

Money market funds are so safe, they earn almost no interest. That means the money you’ve put into these funds is simply sitting there – it isn’t growing, it isn’t disappearing. It’s almost like putting your retirement money right into your bank account. And that’s simply too conservative if you’re trying to make the most out of your 401(k) funds.

How to Make Your 401(k) More Aggressive

If you assess your 401(k) portfolio and determine that your investments are too conservative, it’s easy to make changes. You can alter your investments at any time, and you can pick and choose from a wide selection of different options. Of course, your investment choices will depend on the specifics of your employer’s plan. But you do have the power to change your investments so you can start earning more money.

One of the top ways financial experts recommend “fixing” a conservative portfolio is by increasing your investments in stock funds. Stock funds are riskier, but they also offer bigger returns. 

And for those who are a decade or more away from retirement, stock funds can give you the right amount of risk and a higher number of rewards. Younger investors can take on riskier investments, since you’ll have more time to recoup any losses. It’s also a smart move since you’ll be able to take advantage of compounding interest on any gains you make over the next 10, 20, or 30 years.

Stock funds aren’t your only option. If you’re interested in making your 401(k) investments more aggressive than conservative, you can search online for expert advice. You can learn the latest suggestions from financial professionals, and you can also search for financial advisors who can offer advice and expertise. Just don’t wait – the longer you wait, the less growth you might see.

J Dennis / Shutterstock

Heather Fishel

You May Also Like