Managing your plan's down-side risk

Asset classes (stocks, bonds, cash) react differently to different economic events. That's why we constantly preach asset allocation- 401k risk can be lessened by spreading out your portfolio among the various asset classes.

This is referred to as diversification and it can help protect you against market volatility and down-side risk. How much to allocate depends on your goals, time horizon until retirement, and risk tolerance.

Before you start weighting your portfolio with bonds to manage your down-side risk, consider this...even the most conservative portfolios can be invested in stocks. Stocks help diversify the affect of interest rates and market risks associated with bonds. (Bond prices fall when interest rates rise and vice versa) Stocks also help maintain purchasing power because they outpace inflation over time.

No one can predict the future - bull or bear market. The one thing we can predict is that to lessen 401k risk, diversification will help you reduce volatility and risk in all market conditions. 

Want to refresh yourself on the various asset classes?

See Asset Class Chart