Managing Your 401(k) Investments

Risk Tolerance

In setting your objective, make sure you take into account your risk profile. That is, how much risk are you willing to take? Think of investment and risk as running across a spectrum, with investments with low risk at one end and high risk at the other. With lower-risk investments, safety of principal and minimal or no fluctuation in the value of your account is critical. As a trade-off, you are willing to accept a lower rate of return. Your tolerance for risk is usually lower when your time horizon is short-term. Typical investments are bank accounts, certificates of deposit, and money market funds (cash and/or cash alternatives.)

With higher risk tolerance, your goal is growth in your portfolio. You are seeking higher returns. You are willing to accept greater volatility over the short-term because your time horizon is long-term. Typical investments are growth stocks and growth mutual funds, international stocks and international or global mutual funds, and real estate or real estate mutual funds.

IMPORTANT NOTE: One of your basic objectives should be to achieve a long-term rate of return that is at least 3% above the long-term inflation rate. Keep this in mind as you think about your retirement goals. Both stock and mutual fund investing involves risk, including loss of principal. International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors.

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