Today we are continuing our series on how to structure a successful 401(k) plan for you and your employees. Specifically, we are talking about risk reduction and what it means to re-balance your 401(k) account so you can keep your portfolio in line with a predetermined growth strategy.
To understand how to avoid risk, you must first understand the volatility in a portfolio. The typical measurement of volatility in a portfolio is standard deviation. High standard deviation means high risk in a fund. Meanwhile, a fund with a lower standard deviation is a low-risk fund.
In order to truly diversify, you need to invest in a broad range of different asset classes. By doing this, if your high-risk funds are performing poorly, they are protected by your low-risk funds. It’s important to understand that mitigating risks is relative to time and that risk is always changing.
This leads us to the importance of rebalancing a portfolio to avoid volatility, which we will talk about next time.
In the meantime, if you are ready to take action and learn how you may be able to restructure your current 401(k) plan, we are here to help. You can call or email us to schedule a meeting where we can uncover your biggest opportunities and areas for growth. We look forward to speaking with you soon.