You’ve contributed to your 401 (k) like clockwork, but you don’t see the balance growing fast enough and you start to wonder if your investing strategy is the problem.
Investing more aggressively can accelerate the growth of your retirement savings, but it’s not a strategy for everyone. Here are four factors to help you decide if you’re ready for a bolder investment strategy, plus two alternatives if you’re not.
1. You are not looking for a home run
In this context, investing more aggressively does not not involve penny stocks or any strategy that promises quick wealth. The reality is that only incredible luck can bring you overnight wealth in the stock market. The pursuit of this result may end badly.
Instead, you might consider:
- Increase your exposure to stocks in general. If your portfolio is currently 50% bonds and 50% equities, you can for example increase your percentage of equities to 60%.
- Increase your exposure to growth-oriented stocks, including small and mid caps and emerging markets.
Either strategy could give you higher returns and faster growth over time, but without unnecessary risk taking.
2. Risk and reward go hand in hand
That said, there is no way to invest more aggressively without taking more risk. Before you decide to look for higher returns in your retirement account, think about what that means for your level of risk.
In practice, adding risk to your portfolio usually opens you up to more volatility. A riskier portfolio will reflect more of the usual ups and downs of the stock market. Think carefully about whether you can handle this because not all investors can.
The danger is that a sharp market correction could cause you to sell your investments and hide in cash. As the market crashes, cutting your losses may seem like the right decision. But in the longer term, this strategy usually backfires. You end up selling when stock prices are low and buying later when stock prices have rallied. You are bound to lose money as a result of this course of action.
If volatility can cause you to react this way, you’d better have a more conservative portfolio.
3. Your age matters
The younger you are, the more aggressive you can afford to be in your wallet. This is because you don’t need any money from your retirement account until you retire. And if you don’t have to sell your stocks for 20 or 30 years, you can stay invested and overcome any short-term volatility that comes your way.
The long-term behavior of the stock market supports the strategy of ignoring short-term volatility. Negative returns are common over periods of one or two years, but they are much less likely over longer periods. The market has rarely lost value over a period of 10 years, and it has never lost value over a period of 15 years or more.
If you’re 60 and plan to retire in five years, investing more aggressively may not be such a good idea. If you double your growth stocks and the market takes a bad turn, you could see your nest egg shrink dramatically. Then starting to liquidate your assets so that you can receive retirement distributions would lock in those losses.
If you are 30, on the other hand, you don’t have to think about making withdrawals from your assets before age 35. You can easily stay invested for 15 years or more, which greatly increases your chances of generating positive returns.
4. Your cash balance is a factor
With a smaller cash balance, the risk of investing more aggressively may not be worth the reward.
At some point in life, your retirement account should become one of your most important financial assets. When this happens, it is natural to consider using these funds early if you are in dire financial straits. Unfortunately, dipping into your retirement funds before retirement immediately shortens your investment schedule and puts you at the mercy of market cycles. If the market is going down, you will have to sell your stocks for less than what you would like to get to get the cash you need.
A healthy cash balance outside of your retirement account is a layer of protection against this outcome. If retirement is still decades away, you could make do with enough money to cover six months of your living expenses, for example. If retirement is next year, you may want enough cash or treasury bills to fund several years of running expenses.
Two alternatives to invest more aggressively
Investing more aggressively isn’t the only way to remedy the slow progress in your retirement savings. If you’re hesitant to add risk, you have two other strategies:
- Increase your pension contributions. Saving and investing more will increase the growth of your account over time. Here is an example. A monthly investment of $ 500 that earns 7% on average annually will increase to about $ 84,000 after 10 years. Increase that contribution to $ 750 per month and you add $ 40,000 to that closing balance.
- Delay your retirement. Delaying your retirement helps you in two ways. You will have more time to contribute to retirement and allow your investments to grow. And you also reduce the number of years you will depend on your savings.
Invest more aggressively … with caution
Your risk tolerance, age, and cash balance should all influence how aggressive you are with your retirement portfolio. The goal is to improve your rate of growth without increasing the chances that you will have to sell your holdings when the value of the shares is declining.
If you don’t think this is possible at the moment, increase your pension contributions instead. Then wait a few years and reassess. You may find that the higher contributions got you where you wanted to be, without changing your retirement schedule.