Empowering Your Retirement: Navigating Investment Changes

Empower Retirement offers a range of investment accounts to help individuals save for their financial goals, whether it's for a home purchase, college expenses, or adding to existing retirement savings. Empower provides investment advice and a complete financial view through the Empower Personal Dashboard™. To change investments in Empower Retirement, individuals can log in to their Empower account and navigate to the View/Manage Investments section. From there, they can choose to Change My Investments and either adjust their current investments or change their investment elections for future contributions. This allows individuals to ensure that their investments align with their unique financial situation and goals. Empower also offers features such as Rebalance My Investments, which automatically redistributes account balances to selected investment options, and Dollar Cost Averaging, which helps reduce exposure to stock market fluctuations.

Rebalancing your portfolio

When you build your investment portfolio, you decide on a specific asset allocation that takes into account your financial goals, risk tolerance, and time horizon. However, over time, certain investments will have higher returns than others and will, therefore, take up a larger percentage of your portfolio. For example, in a bull market, the share of your portfolio devoted to equities is likely to grow, while the share of fixed-income securities like bonds will shrink. This will increase the overall risk of your portfolio. Rebalancing gets your portfolio back to your target asset allocation and helps ensure you are not taking on more risk than you are comfortable with.

There are two main ways to rebalance your portfolio:

• Sell high-performing assets: Sell some of your high-performing assets to buy more of the low-performing securities. For example, if your target asset allocation is 60% stocks and 40% bonds, but your portfolio has shifted to 70% stocks and 30% bonds, you would sell 10% of your stocks to buy bonds. This is the most common approach to rebalancing.
• Allocate new money: Instead of selling existing securities, you can allocate new money to the lower-performing securities until you reach your target asset allocation.

There are two main approaches to determining how often you should rebalance your portfolio:

• Set calendar schedule: You can rebalance based on a set calendar schedule, such as once every quarter, every six months, or every year. This approach is easier to plan for, but the downside is that you may end up rebalancing when it is not necessary.
• Rebalance based on asset allocation: With this approach, you would typically rebalance your portfolio each time your asset allocation has strayed from your target by a certain percentage. For example, the 5/25 rule suggests rebalancing when an asset class shifts from its original target by 5%. This approach ensures that you are only rebalancing when your portfolio needs it. However, remember that rebalancing too often can result in costly transaction fees and capital gains taxes.

Dollar-cost averaging

For example, if you invest $100 every month, you will buy fewer shares when the market is up, but your money will buy more when the market is down. Over time, this strategy could lower your average cost per share compared to buying all your shares at once when they are expensive.

However, it's important to note that dollar-cost averaging may also reduce your potential returns. If the price of the investment rises while you are executing this strategy, you will end up buying fewer shares than if you had made a lump-sum investment at the outset. Additionally, the funds are typically held in cash or cash equivalents, which earn very low rates of return.

Risk creep

"Risk creep" is a term used to describe the inadvertent or unintentional introduction of risk to an investment portfolio. This can occur when a new, more volatile asset class with a high correlation to existing assets is added, or when there is a drift in weightings—for example, holding more equities during a bull market. Risk creep can go unnoticed by the investor, who may be unaware of the increased risk they are taking on.

• Too much investment risk: Younger investors are typically advised to take on more risk to achieve higher returns. However, it is possible for them to push this strategy too far by investing in very aggressive assets or opportunities that may be too risky for most people, regardless of age. Examples include penny stocks, venture capital funds, and investments in startup businesses. In these cases, there may be no floor to potential losses, and investors could lose everything.
• Too little investment risk: Investors who are too conservative expose themselves to the risk of inflation, which erodes purchasing power over time. While these investors may be comfortable keeping their money in a savings account because the value doesn't fluctuate, the low returns offered by savings accounts often fail to keep up with inflation, resulting in a net loss.
• Too much diversification: While diversification is a common strategy for managing risk, it is possible to over-diversify. This can happen when investors add more investments to a target-date mutual fund, such as a 401(k) retirement account. Target-date funds periodically adjust the mix of assets to become more conservative as the target date approaches. However, adding more investments can change the allocation and inadvertently increase risk.
• Too little diversification: Under-diversification is a more common risk, where investors buy individual stocks, thinking they understand the company, but end up assuming more risk than a diversified fund. Employees who receive company stock or purchase shares at a discount through an employee stock ownership plan are particularly prone to under-diversification, as their income and wealth become tied to the fortunes of a single company.
• Emotions and overconfidence: Emotional factors, such as overconfidence or fear, can also lead to risk creep. Overconfident investors may feel that their investment choices are automatically correct and fail to research their investments adequately. On the other hand, fearful investors may be too cautious and miss out on wise investment opportunities due to anxiety.
• Using past performance as a guide: Many investors make decisions based on their own experience or recent market history, exposing themselves to the risk of loss, inflation, or inadequate returns. For example, during the stock market crash of 2008-2009, many investors sold their investments because they had taken on more risk than they could handle and then missed out on gains by reinvesting too late.

Aggressive vs conservative investing

When it comes to investing, there are two main approaches: aggressive and conservative. But what do these terms mean, and which approach is right for you? Let's take a closer look at the key differences between these investment strategies and how they might apply to your Empower Retirement account.

Aggressive investing generally involves taking on more risk in the pursuit of higher returns. Aggressive investors are comfortable with market volatility and are willing to accept potential losses in exchange for the possibility of larger gains. This approach typically involves a higher allocation of stocks in an investor's portfolio, with the understanding that stocks tend to outperform other asset classes over the long term. For this reason, aggressive investing is often recommended for younger investors who have a longer time horizon and can weather the ups and downs of the market.

On the other hand, conservative investing prioritizes capital preservation over maximizing returns. Conservative investors have a lower risk tolerance and are willing to accept steadier, lower returns to avoid significant losses. As such, conservative portfolios often include safer investments, such as cash and bonds, rather than riskier stocks. This approach is usually recommended for older investors with a shorter time horizon, as it provides more stable returns and reduces the likelihood of substantial losses close to retirement.

It's important to note that your investment strategy may change over time as your financial situation, risk tolerance, and time horizon evolve. For example, while aggressive investing is often suggested for younger investors, those same investors may need to adjust their strategy as they get closer to retirement. Similarly, an older investor may choose to adopt a more aggressive approach if they have a longer time horizon and are comfortable with the associated risks.

So, how does this apply to your Empower Retirement account? As a general principle, financial experts suggest that investors should be more aggressive when they have a long time horizon until retirement and gradually shift towards a more conservative approach as retirement draws near. This can be achieved by adjusting the asset allocation in your portfolio, moving from a higher percentage of stocks to a higher percentage of bonds and cash alternatives over time.

In conclusion, the decision to invest aggressively or conservatively depends on various factors, including your risk tolerance, time horizon, financial goals, and life stage. It's important to regularly review your investment strategy and make adjustments as needed to ensure it aligns with your evolving needs and goals. By understanding the key differences between aggressive and conservative investing, you can make more informed decisions about your Empower Retirement account and take control of your financial future.

Using new money

To change investments in your Empower 401(k) portfolio, you must first log in to your Empower account. In the “I want to…” section, click “More” to expand your options, then click “View/manage investments”. On the “My investments” page, click “Change My Investments”.

There are two ways to rebalance your Empower 401(k) portfolio: using new money, or selling some of your "winners". Using new money involves adding money to your portfolio and allocating these new funds to assets or asset classes that have decreased in value. For example, if bonds have decreased from 40% of your portfolio to 30%, you can purchase enough bonds to return them to their original 40% allocation.

It's important to note that asset allocation and diversification are investment principles designed to manage risk, but they do not guarantee against loss. Periodically rebalancing your portfolio to match your desired risk tolerance is a sound practice regardless of market conditions.

Frequently asked questions