How to diversify your 401(k) in under an hour

Spreading money across different types of assets and risk levels - aka “diversification” - is a basic principle of investing.

If you have a 401(k) retirement account and haven’t adjusted the portfolio’s risk level and asset mix in a while, don’t worry; the process isn’t difficult. In fact, changes can be made in less than a day, said wealth manager Phil Battin, CEO of Illinois-based Ambassador Wealth Management.

“For those that are more technically savvy, it's usually two to five minutes [of work] unless you want to do a lot of deep dive analysis,” Battin said. “[But], if a person, in general, allocated 15 to 30 minutes…I think that’s more than enough time.”

Following a few simple steps can help investors navigate the diversification process with a little more confidence.

Often, the administrator that runs the 401(k) account will offer diversification options based on risk preference: low, mid and high are common.

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If you selected a low-risk portfolio when setting up the account but think it may be time to change that strategy, take a moment to reflect on your risk tolerance, Battin said.

“Every program, whether it’s Fidelity or Principal or Securian or Empower; every one of them have [an option to] identify your risk tolerance,” he said. “So, the first action step is identifying the risk tolerance that you naturally [can] handle. It’s a very simple questionnaire.”

If high-risk investments that experience significant ups and downs cause too much stress, a high-risk portfolio may not be the right fit.

If that’s the case, going with a low- or mid-risk option would be a better fit, most likely.

Diversifying a portfolio isn’t just about risk tolerance; it’s about how far away retirement is, too, Battin said.

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Those who are close to retiring should consider sticking with a lower-risk strategy to avoid any significant losses before they stop working.

Since their 401(k) will likely be used as an income source, steady returns are important for making that income last as long as possible.

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However, those who are early in their career can afford to take on riskier assets when they diversify, Battin said.

“[When you] get into the retirement red zone, and that's within five years of retirement … you must be wise and derisk the portfolio,” he said. “If the individual in question is young and is so far from that retirement date … I tell them to be as growth-oriented as possible.”

Once the risk assessment is complete and a strategy based on a retirement timeline is set, diversifying a 401(k) can be done with just a few clicks.

Online accounts typically offer a choice of low-, medium- and high-risk options that the plan’s administrator has already diversified.

Typically, each option offers a fact sheet that shows how the portfolio’s assets are spread out.

The data is something you can skim, or, for those who like to dig into the details, it can be an opportunity to do a deep dive into what’s under the investment hood.

Between the initial risk assessment and choosing a risk level, diversifying a 401(k) could take less than five minutes, Battin said.

For those who want to take a more active approach to diversification, education is important, Battin said.

Ideally, an educated investor would look at their 401(k) quarterly and make adjustments based on their portfolio growth.

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For example, if the portfolio is booming but there are opportunities to buy into other assets and industries that may be at a low point, selling high and exploring those other options might make sense, Battin said.

“An educated investor should always do better than the uneducated investor,” he said. ”Typically, an educated investor is willing to look at their portfolio quarterly and make adjustments to continue to sell high.”

It’s not a guarantee that educated investors will always earn more than those with less investing knowledge. However, those who are more savvy may check their portfolios more often - quarterly, Battin pointed out, as opposed to yearly - and might be able to take advantage of sell-high, buy-low moments.

Fact sheets included with a 401(k)’s risk levels can offer plenty of information. Investors can turn to their plan administrator’s online education resources, too, and ask questions via phone support.

Respected investment firms like Vanguard offer helpful learning material online. The Securities and Exchange Commission offers an introductory education about investing, too.