A 401(k) retirement plan is one of the most popular ways to save money for retirement and score some tax breaks for doing so. But often these plans don’t provide a lot of guidance on how to manage them, and participants end up with wildly aggressive portfolios, or, what experts often see, a portfolio so conservative that it barely budges year after year.

Here’s how to see if your 401(k) is too aggressive and, if so, some steps you can take to fix it.

What is an aggressive 401(k) investment?

When experts speak of being aggressive, they generally mean how much of your assets are in stocks or stock funds. Stocks are an attractive long-term investment, but they fluctuate a lot in the short term. That’s problematic, especially for soon-to-retire investors. If all or almost all of your retirement account is in stocks or stock funds, it’s aggressive.

While being more aggressive can make a lot of sense if you have a long time until retirement, it can really sink you financially if you need the money in less than five years. To reduce risk, investors can add more bond funds to their portfolio or even hold some CDs.

“A large downturn in the market immediately preceding retirement can have devastating effects on an individual’s standard of living in retirement,” says Dr. Robert Johnson, finance professor at Creighton University’s Heider College of Business.

Johnson points to those who retired at the end of 2008 and who were invested only in the Standard & Poor’s 500 Index (S&P 500), which contains hundreds of top companies.

“If they were invested in the S&P 500, they would have seen their assets fall by 37 percent in one year,” he says.

But those who had some investments in other assets such as bonds or even cash would have seen a much lower overall decline. Of course, any money in the S&P 500 would have declined by a similar amount, but by having fewer eggs in that basket, their overall portfolio declined less.

That principle of diversification is paramount in making sure that your portfolio is not too aggressive.

But many workers make the opposite mistake, not investing aggressively enough. If you have more than five years until retirement, and certainly if you have 10 or more, you can afford to be more aggressive, because you have the time to ride out the market’s ups and downs.

3 signs your 401(k) is too aggressive

If you think your portfolio might be too aggressive, here are some signs to look for.

1. Your account balance fluctuates a lot.

It can be exciting to see your balance run up quickly, but it’s important to realize that this could be an effect of a 401(k) that’s invested too heavily in stock funds and not enough in safer alternatives.

“If you take someone with an account balance of $100,000 and after one month their account is now $110,000, or 10% growth in a month, what that tells me is that they probably have most of their money in stocks,” says Matthew Trujillo, CFP at Center for Financial Planning in Southfield, Michigan.

“This will feel great when things are going up, but that investor needs to be prepared to see some significant paper losses when we experience a downturn like what we just saw in March and April 2020,” says Trujillo.

2. You worry a lot about your 401(k).

If downturns in your 401(k) cause you a lot of worry, then you might be investing too aggressively.

“If someone tends to move out of their investments because of volatility, then the portfolio is probably too aggressive for them,” says Randy Carver, president and CEO at Carver Financial Services in the Cleveland area.

But it’s key to understand that while stocks are more volatile and you might not always feel comfortable owning them, they are one of the best ways to grow your wealth in time, especially in an era of low interest rates and low bond yields.

“If they are not invested to grow enough to meet long-term needs, it is too conservative,” says Trujillo. “The key is to look at longer periods of time, two or three years or more, to see trends, not just one or two months.”

3. You need cash soon, but your 401(k) doesn’t have any.

If you know you’re going to need cash in the next few years, your 401(k) needs to be factoring that in. That doesn’t mean you need to sell everything and go to cash now, but you can leave new contributions in cash or move them into lower-risk bond funds, slowly reducing aggressiveness.

To gauge your plan’s aggressiveness, use the rule of 100, suggests Chris Keller, partner at Kingman Financial Group in San Antonio. With this rule, you subtract your age from 100 to find your allocation to stock funds. For example, a 30-year-old would put 70% of a 401(k) in stocks. Naturally, this rule moves the 401(k) to become less risky as you approach retirement.

Pointing to the importance of a 70-year-old reducing risk, Keller says, “Losing half of your portfolio while at this age might have a huge impact on what your retirement looks like.”

How aggressive should your 401(k) be?

How aggressively you need to invest depends on many factors, but here are some of the most important for determining how to invest:

Future needs. If you need a lot of money for retirement or want to live an opulent lifestyle, you should invest more aggressively. If your needs are lower, you can afford to be less aggressive.

Ability to save. If you have a strong ability to save money, then you can afford to take less risk and meet your financial goals. If you can’t save as much, then you’ll need to be more aggressive with your investments to reach your goals.

Time horizon. The more time until you need the money, the less aggressively you need to invest. If you have decades until retirement – even just a full decade – you have a lot of time to ride out the market’s fluctuations and take advantage of the compounding power of stocks.

Risk tolerance. If you have low tolerance for risk, you might not want to be so aggressive, but that means you’ll need to save more or give yourself more time before retirement to accumulate the level of money that you need.

Those are some of the key factors to consider when determining how aggressively to invest. But many financial advisers would say that investors with decades until retirement could reasonably invest 100% of their 401(k) into diversified stock funds. Others with less than a decade until they need the money might consider becoming more conservative over time.

What is the average return for an aggressive 401(k)?

There’s no hard and fast rule for what you can earn on an aggressive portfolio. The return always depends on the performance of the stocks or stock funds in the portfolio. Stocks can fluctuate a lot, but historically a broadly diversified portfolio of stocks has shown strong gains.

For example, the Standard & Poor’s 500 index has returned about 10 percent annually. The best mutual funds have done even better recently, with some topping more than 20 percent annually.

But that’s the level of return you can achieve only if you’re fully invested in the most aggressive kind of portfolio — all stocks. If you need a portion of your portfolio to be more conservative, perhaps because you’re nearing retirement, you’ll probably want to add safer but lower-yielding bonds to the mix. In that case you should expect your overall returns to be lower.

And it’s worth repeating that stocks fluctuate, so you have to hold on or you won’t get these returns.

Having a 401(k) portfolio that’s too aggressive can come with a number of disadvantages, from the annoying to the financially destructive. Here are some of the most common:

Your wealth fluctuates a lot. If you’re overexposed to stocks, your portfolio will bounce around more than it will with less exposure. That can be OK if you have a long time until retirement, but it’s potentially much more costly if you’re close to retirement.

You might need to access your money when the market’s down. If you’re too aggressive with only a few years or less until retirement, you’re wagering that the market will stay strong until you tap your money. If it doesn’t, you’ll have to start taking distributions in a down market, hurting your long-term retirement finances.

A too-aggressive portfolio could scare you out of the market. The secret to scoring big returns in the market is staying invested. So if a volatile portfolio scares you out of the market, you lose the key advantage of investing in stocks.

Less diversification might mean higher risk. A diversified stock portfolio can be useful, but if you’re in all stocks, your overall portfolio may not be as diversified as it could be. So, if something negatively impacts stocks as a whole, your diversification among stocks won’t help you.

If your portfolio is all stock, then you might not generate much cash. If you’re taking distributions, it can be useful to have a portfolio with some cash-producing bonds or CDs, helping you weather a downturn or allowing you to stay invested in stocks, which usually show better long-term returns.

Those are some of the largest disadvantages of being too aggressive in your 401(k).

Investors who find their portfolio is too aggressive have potential fixes for this issue that range from simple one-time moves to an overhaul of your financial plan with a financial adviser.

The first step is to take down the risk in your portfolio by moving some exposure in stock funds (or even riskier options) into bond funds or even cash, depending on when you need the money.

One good path is to find an asset allocation between stocks, bonds and cash that meets your needs and temperament. A more aggressive allocation might have 70% or more in stocks, while a more conservative one might have that much in bonds. Then stick with this allocation and rebalance it when it moves too far away from your target allocation.

“This means that often a market correction is a good time to shift more to stocks, not less,” says Carver. “The key is sticking with a target allocation which eliminates the need to make decisions based on market behavior or predictions.”

If you’re managing the portfolio yourself, Johnson recommends starting the risk reduction perhaps as much as five years before you’ll want to access the portfolio. That doesn’t mean you need to go all cash and bonds, but rather gradually move the portfolio toward lower total risk.

If you don’t want to make these changes yourself, then use a target-date fund to manage the process for you. It automatically shifts money from stocks to bonds as you near your target date, which may be retirement, but could be any time when you need to start withdrawing some cash.

Another good option is to meet with your own advisor and your company’s 401(k) advisor each January, says Paul Miller, managing partner at accountancy Miller & Co. in the New York City area.

“It’s critical for an employee to hear what they have to say,” says Miller. “Take notes and then go to the web and read reviews about each fund. For example, you can use Morningstar to independently rate and review your funds.”

Finally, it can be useful to have a financial adviser review your 401(k), but you must find one who works in your best interest and not one who is paid to put you in certain financial products. Here’s how to find the right adviser for you.

“It’s important to note that a retirement date is not the finish line – even if someone is going to retire at age 60 or 65 the funds could be needed for another 20-25 years,” says Carver. “They should continue to be invested in a diversified allocation that has growth potential.”

So even as you age and take a less aggressive investment approach, it’s vital to remember that you probably still need some exposure to stocks in your portfolio and to plan accordingly.