When thinking about asset allocation and risk tolerance, an often-overlooked consideration is the nature of one’s income stream. If you are a business owner, then your net worth is likely tied up in the equity value of your business. Because business ownership carries an inherent level of risk, maintaining a conservative allocation in your investment portfolio could be warranted.

You will likely want to take a similar approach if you don’t own a business but your income fluctuates meaningfully from year to year. Conversely, if your income is highly stable then you might have more flexibility to take risks with your investments. Income-based factors are one input into your ability to bear risk.

Health is another factor that contributes to your ability to accept risk. Do you currently have, or expect to face, elevated healthcare expenses? If the answer is yes then you might want to reduce the risk profile of your retirement plan by shifting some assets to cash and bonds. However, if you have long-term care or other arrangements in place you might be able to accept more risk in your portfolio.

It is also helpful to reflect on your own behavioral approach to investing. This is commonly referred to your willingness to accept risk. Are you able to stomach equity market drawdowns and potentially use them as buying opportunities, as we experienced in 2018, 2020 and 2022? Or did you sell on the way down during those challenging periods? Together, ability and willingness to accept risk form your risk tolerance.

The biggest risk to success with a stock-heavy portfolio is selling when the market turns against you. Having the fortitude to stick with positions during volatile periods in the market indicates a greater willingness to accept risk. This can nudge your risk tolerance upward and justify holding a larger relative equity allocation. (A financial advisor can help you create an investment plan and stick to you.)

It’s critical to then compare your goals, risk tolerance and return requirements to the asset allocations across your accounts and make sure they match.

Investors in their 60s will typically hold between 40% and 60% of their invested assets in stocks. Holding 82% of your retirement plan assets in stocks could be a sound decision if you own other accounts that are allocated more heavily towards bonds and cash. If that is not the case, then reducing the stock allocation in your 401(k) or other accounts could be beneficial. (And if you need more help making these decisions, consider matching with a financial advisor.)

Of course, it is critical that you align this overall asset allocation with your long-term goals, time horizon and risk/return objectives – age is not the only criterion!

While age represents an important driver of asset allocation decisions, additional factors should be considered before shifting your portfolio from stocks to bonds. We encourage you to look beyond age to understand your longer-term goals and where you are currently in relation to those goals. It is also important to think critically about other factors that might adjust your personal risk profile and return requirements upward or downward.

Lastly, evaluate your asset allocation holistically, incorporating any other investment accounts you own in addition to your 401(k) plan. In doing so, you can more accurately assess your time horizon, risk tolerance and return objectives, which will help you allocate among stocks, bonds, cash and other securities in a way that will put you on the best path to achieve your goals.

• Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have free introductory calls with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

• When talking with prospective financial advisors, it’s important to ask the right questions. As you consider your options, these are the questions you should ask an advisor to ensure you make the right choice.

• Keep an emergency fund on hand in case you run into unexpected expenses. An emergency fund should be liquid — in an account that isn’t at risk of significant fluctuation like the stock market. The tradeoff is that the value of liquid cash can be eroded by inflation. But a high-interest account allows you to earn compound interest. Compare savings accounts from these banks.

• Are you a financial advisor looking to grow your business? SmartAsset AMP helps advisors connect with leads and offers marketing automation solutions so you can spend more time making conversions. Learn more about SmartAsset AMP.

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