Playing It Too Safe Has Its Own Risks

Taking on too much or too little risk in your portfolio is a genderless issue, but the implications of that decision are not. "An investment mistake is especially devastating for women," says Sue Stevens, Morningstar's financial-planning specialist. "Because women tend to earn less than men, it's often harder for them to bounce back from a big loss in the market." Yet women do need to be risk-takers: They live longer than men, and thus must build up more capital for retirement.

But how much risk is appropriate? "The best way to choose the right risk level for you is to understand how the choices you make today affect your chances of reaching your goals," says Christopher Jones, a strategist at Financial Engines ( As an investment adviser, Financial Engines offers retirement forecasts for free and customized advice for $14.95 a quarter via the Internet.

Financial Engines and other interactive planning services can help you ascertain your risk tolerance and create an investing strategy. They can forecast the income you're likely to have in retirement, or how your asset allocation affects the likelihood you'll meet your goal. There is no service yet that can help you with short-term goals or assets that aren't tax-deferred.

To demonstrate why risk assessment is critical, I asked Financial Engines to create a hypothetical portfolio for a 40-year-old single female who earns $75,000 a year and wants to retire at 65 with the same level of income from savings and Social Security. We assumed her salary rises at 1.5% a year over inflation and she contributes 12% of it to her 401(k), with a company match of 6%. She already has $150,000 in her 401(k).

MISSED GOAL. The three pie charts show how our investor might fare. If she invests conservatively (74% of her portfolio in cash and bonds, the rest in stocks), she'll have only a 42% chance of meeting her goal. There's a very small risk of losing money in the next year if the markets tank. "But the bigger risk is her not meeting her goal, rather than how much she'll lose in the coming year," says Jones. Even with a conservative investment strategy, she still has a 50% chance of reaching a retirement income of $72,400 and a 95% likelihood at retiring with $53,900 or more a year.

With a moderately risky strategy (74% stocks, 26% bonds), she has a 72% chance of meeting her target. But what if she follows a high-risk strategy (83% small-cap and 17% big-cap stocks, no cash or bonds)? Her chance of reaching her goal inches up to 75%--not much better than the moderate approach. The high-risk strategy also, however, delivers a 50% chance of her earning $112,000 in retirement income. But she faces a much greater chance of losing money, too. Meanwhile, the worst-case income scenarios are all within the same range ($53,900 to $47,400), regardless of risk level. So the downside for the moderate- and high-risk options isn't so terrible. And they can produce a lot higher returns. If you can handle some big market swings and have a long time horizon, consider increasing your risk level.

Most women tend to invest too conservatively to generate enough income for their life span. That's because they don't understand what can happen over the long run. Do your own forecast. Then you'll know where you are and what you need to change.

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