You’ve been contributing to your 401(k) like clockwork, but you’re not seeing the balance rise fast enough, and you’re starting to wonder if your investing strategy is the problem.
Investing more aggressively can create faster growth in your retirement savings, but it’s not a strategy that’s right 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’re not looking for a home run
In this context, investing more aggressively does not involve penny stocks or any strategy that promises quick wealth. The reality is only incredibly good luck can bring you overnight riches in the stock market. Chasing that outcome is likely to end badly.
Instead, you might consider:
- Increasing your exposure to stocks generally. If your portfolio is currently 50% bonds and 50% stocks, you could raise your stock percentage to 60%, for example.
- Increasing your exposure to growth-oriented stocks, including small caps, mid caps, and emerging markets.
Either strategy could bring you higher returns and faster growth over time but without unnecessary risk taking.
2. Risk and reward go together
That said, there’s no way to invest more aggressively without taking on more risk. Before you decide to pursue higher returns in your retirement account, consider what that means for your risk level.
In practice, adding risk to your portfolio usually opens you up to more volatility. A riskier portfolio will reflect the stock market’s usual ups and downs to a greater degree. Think carefully about whether you can handle that, because not every investor can.
The danger is a big market correction might push you to sell your investments and hide out in cash. In the moment when the market’s crashing, cutting your losses might seem like the right move. But longer term, that strategy usually backfires. You end up selling when share prices are low and buying later when share prices have recovered. You’re bound to lose money following that course of action.
If volatility might push you to respond in such a manner, you’re better off with a more conservative portfolio.
3. Your age matters
The younger you are, the more aggressive you can afford to be in your portfolio. This is because you don’t need any cash 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 ride out whatever short-term volatility comes your way.
The long-term behavior of the stock market supports the strategy to ignore short-term volatility. Negative returns are common over one- or two-year time spans, but they’re far less likely over longer periods. The market has rarely lost value over any 10-year stretch, and it has never lost value over a period of 15 years or more.
If you’re 60 and planning to retire in five years, investing more aggressively might not be such a good idea. If you double down on growth stocks, and the market takes a bad turn, you could see your nest egg shrink dramatically. To then start liquidating your holdings so you can take retirement distributions would lock in those losses.
If you’re 30, on the other hand, you don’t have to start thinking about making withdrawals from your holdings for another 35 years. You can easily stay invested for 15 years or more, which greatly increases your chances of earning 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 largest financial assets. When that happens, it’s natural to consider using those funds early if you’re in a tough spot financially. Unfortunately, tapping your retirement funds before retirement immediately shortens your investment timeline and puts you at the mercy of market cycles. If the market’s down, you’ll have to sell your shares for less than you’d like to get the cash you need.
A healthy cash balance outside of your retirement account is a layer of protection against that outcome. If retirement is still decades away, you could get by with enough cash to cover six months of your living expenses, for example. If retirement is next year, you might want enough cash or Treasury bonds to fund several years of living expenses.
Two alternatives to investing more aggressively
Investing more aggressively isn’t the only way to address slow progress in your retirement savings. If you’re reluctant to add risk, you have two other strategies available:
- Increase your retirement contributions. Saving and investing more will ramp up your account growth over time. Here’s an example. A $500 monthly investment earning 7% on average annually will grow to about $84,000 after 10 years. Increase that contribution to $750 monthly, and you add $40,000 to that ending balance.
- Delay your retirement. Delaying your retirement helps you in two ways. You’ll have more time to make retirement contributions and allow your investments to grow. And you shorten the number of years you’ll be reliant on your savings too.
Invest more aggressively … with caution
Your tolerance for risk, your age, and your cash balance should all influence how aggressive you are with your retirement portfolio. The goal is to improve your growth rate without increasing the chances you’ll have to sell out of your holdings when share values are down.
If you don’t think that’s possible right now, raise your retirement contributions instead. Then, wait a few years and reassess. You might find that the higher contributions got you to where you wanted to be, without changing your retirement timeline.
