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Risk Management and Your Retirement Savings

Risk Management and Your Retirement Savings

January 09, 2020

By investing for retirement through your
employer-sponsored plan, you are helping to manage
a critically important financial risk: the chance that you
will outlive your money. But choosing to participate is
just one step in your financial risk management
strategy. You also need to manage risk within your
account to help it stay on track. Following are steps to
Familiarize yourself with the different
types of risk
All investments, even the most conservative, come
with different types of risk. Understanding these risks
will help you make educated choices in your
retirement savings plan mix. Here are just a few.
• Market risk: The risk that your investment could
lose value due to falling prices caused by outside
forces, such as economic factors or political and
national events (e.g., elections or natural
disasters). Stocks are typically most susceptible to
market risk, although bonds and other investments
can be affected as well.
• Interest rate risk: The risk that an investment's
value will fall due to rising interest rates. This type
of risk is most associated with bonds, as bond
prices typically fall when interest rates rise, and
vice versa. But often stocks also react to changing
interest rates.
• Inflation risk: The chance that your investments
will not keep pace with inflation, or the rising cost
of living. Investing too conservatively may put your
investment dollars at risk of losing their purchasing
• Liquidity risk: This is the risk of not being able to
quickly sell or cash-in your investment if you need
access to the money.
• Risks associated with international investing:
Currency fluctuations, political upheavals, unstable
economies, additional taxes--these are just some
of the special risks associated with investing
outside the United States.

Know your personal risk tolerance
How much risk are you willing to take to pursue your
savings goal? Gauging your personal risk
tolerance--or your ability to endure losses in your
account due to swings in the market--is an important
step in your risk management strategy. Because all
investments involve some level of risk, it's important
to be aware of how much volatility you can
comfortably withstand before you select investments.
One way to do this is to reflect on a series of
questions, which may include the following:
• How much do you need to accumulate to
potentially provide for a comfortable retirement?
The more you need to save, the more risk you may
need to take in pursuit of that goal.
• How well would you sleep at night knowing your
investments dropped 5%? 10%? 20%? Would you
flee to "safer" options? Ride out the dip to strive for
longer-term returns? Or maybe even view the
downturn as a good opportunity to buy more
shares at a value price?
• How much time do you have until you will need the
money? Typically, the longer your time horizon,
the more you may be able to hold steady during
short-term downturns in pursuit of longer-term
goals--and the more risk you may be able to
• Do you have savings and investments outside your
employer plan, including an easily accessed
emergency savings account with at least six
months worth of living expenses? Having a safety
net set aside may allow you to feel more confident
about taking on risk in your retirement portfolio.
Your plan's educational materials may offer
worksheets and other tools to help you gauge your
own risk tolerance. Such materials typically ask a
series of questions similar to those above, and then
generate a score based on your answers that may
help guide you toward a mix of investments that may
be appropriate for your situation.

Develop a target asset allocation
Once you understand your risk tolerance, the next
step is to develop an asset allocation mix that is
suitable for your investment goal while taking your
risk tolerance into consideration.
Asset allocation is the process of dividing your
investment dollars among the various asset
categories offered in your plan, typically stocks,
bonds, and cash/stable value investments. Generally,
the more tolerant you are of investment risk, the more
you may be able to invest in stocks. On the other
hand, if you are more risk averse, you may want to
invest a larger portion of your portfolio in conservative
investments, such as high-grade bonds or cash.
Your time horizon will also help you determine your
risk tolerance and asset allocation. If you're a young
investor with a hardy tolerance for risk, you might
choose an allocation with a high concentration of
stocks because you may be able to ride out
short-term swings in the value of your portfolio in
pursuit of your long-term goals. On the other hand, if
retirement is less than 10 years away and you can't
afford to risk losing money, your allocation might lean
more toward bonds and cash investments. (However,
consider that within the bond asset class, there are
many different varieties to choose from that are
suitable for different risk profiles.)

Be sure to diversify
All investors--whether aggressive, conservative, or
somewhere in the middle--can potentially benefit from
diversification, which means not putting all your eggs
in one basket. Holding a mix of different investments
may help your portfolio balance out gains and losses.
The principle is that when one investment loses
value, another may be holding steady or gaining
(although there are no guarantees).
Let's look at the previous examples. Although the
young investor may choose to put a large chunk of
her retirement account in stocks, she should still
consider putting some of the money into bonds and
possibly cash to help balance any losses that may
occur in the stock portion. Even within the stock
allocation, she may want to diversify among different
types of stocks, such as domestic, international,
growth, and value stocks, to reap any potential gains
from each type.
What about more conservative investors, such as
those nearing or in retirement? Even for these
individuals it is generally advisable to include at least
some stock investments in their portfolios to help
assets keep pace with the rising cost of living. When
a portfolio is invested too conservatively, inflation can
slowly erode its purchasing power.

Understanding dollar cost averaging
Your employer-sponsored plan also helps you
manage risk automatically through a process called
dollar cost averaging (DCA). When you contribute to
your plan, chances are you contribute an equal dollar
amount each pay period, and that money is then used
to purchase shares of the investments you have
selected. This process--investing a fixed dollar
amount at regular intervals--is DCA. As the prices of
the investments you purchase rise and fall over time,
you take advantage of the swings by buying fewer
shares when prices are high and more shares when
prices are low--in essence, following the old investing
adage to "buy low." After a period of time, the average
cost you pay for the shares you accumulate may be
lower than if you had purchased all the shares in one
lump sum.
Remember that DCA involves continuous investment
in securities regardless of their price. As you think
about the potential benefits of DCA, you should also
consider your ability to make purchases through
extended periods of low or falling prices.

Perform regular maintenance
Although it's generally not necessary to review your
retirement portfolio too frequently (e.g., every day or
even every week), it is advisable to monitor it at least
once per year and as major events occur in your life.
During these reviews, you'll want to determine if your
risk tolerance has changed and check your asset
allocation to determine whether it's still on track. You
may want to rebalance--or shift some money from
one type of investment to another--to bring your
allocation back in line with your original target,
presuming it still suits your situation. Or you may want
to make other changes in your portfolio to keep it in
line with your changing circumstances. Such regular
maintenance is critical to help manage risk in your
When developing a plan to manage risk, it may also
help to seek the advice of a financial professional. An
experienced professional can help take emotion out
of the equation so that you may make clear, rational

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any
individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance
referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.
The information provided is not intended to be a substitute for specific individualized tax planning or legal advice. We suggest that you consult
with a qualified tax or legal advisor.
LPL Financial Representatives offer access to Trust Services through The Private Trust Company N.A., an affiliate of LPL Financial.

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