How much risk should a 40-year-old investor take?

Personal finance Q&A with Steve Dinnen.

Q: I'm 40 years old and employed full time. I contribute $1,200 monthly to my deferred compensation 457 plan. My investment portfolio is allocated based on my age, meaning it's still pretty aggressive, with a lot of stock funds. The value of my 457 portfolio has fallen into a wretched abyss and my question is: Should I move a portion of it into "safer" territory now, or should I wait it out? I have a good 15 to 20 years until I can retire. I get advice that I should more actively manage my retirement 457 portfolio, but then I'm also stretched thin with small children and professional commitments. The same scenario applies to my kids' college funds (in 529 plans) One has eight years until college, the other has 12 years.

C.J., via e-mail

A: The good news for your 457 is that you have time on your side for your portfolio to recover, says certified financial planner Conway Halsall, of Vienna, Va. In addition, he says you have been making regular deposits into your account on a monthly basis. So when the markets recover – and they will – you'll discover that the average cost per share of your investment is much lower.

In the meantime, you need to assess your current risk tolerance and how you emotionally are dealing with the market's volatility. If the swings in the market and the risk of future declines have become just too much for you now, then you may wish to reduce some of your market risk.

Since your investment is allocated based upon age, Mr. Halsall says you can simply pick a target age for retirement that's sooner than what you previously considered. By doing so, you'll be using a portfolio that has more bond exposure and less equity. Year-to-date into early April, he has seen an approximately 2 percent total return increase in investment-grade bonds, a 6 percent total return for the upper end of the speculative bond market, and a 12 percent total return for high-yield bonds.

Your financial adviser and 457 plan administrator should be able to help you with a target age that has a choice of equities and bonds in the right mix to meet your current risk needs. Just remember that as the markets turn around, you'll want to return to your actual target age.

The same principles apply to your 529 plans, says Halsall. Under new IRS regulations, you're allowed to make two transfers per year. There should be no costs associated with these transfers, but check with your plan administrators. You may wish to reduce the risk and volatility for now by moving to a college commencement target age that's before your children's actual date. This will increase the bond portion of your portfolio and may help to reduce the portfolio volatility.

When you're more comfortable with the market, he says, move back to a target age more appropriate to your children's ages.

Submit your question to Steve Dinnen at

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