What are the real risks of your retirement plan?

(Money Magazine) -- Question: My adviser is recommending that I put about 80% of my retirement portfolio into large-cap stocks? I'm 40 years old -- is that too big of a risk at my age? -- Mark, Shelby Township, Mich.

Answer: It's hard for me to gauge the actual risk level of your portfolio since you've told me about only 80% of it. What gives with the other 20%? Is it in bonds? Small-cap stocks? Emerging market funds? Gold? Some combination of these and other assets?

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Walter Updegrave is a senior editor with Money Magazine and is the author of "How to Retire Rich in a Totally Changed World: Why You're Not in Kansas Anymore" (Three Rivers Press 2005).

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The answers to such questions can significantly affect the riskiness of your portfolio overall. A portfolio that has 80% in large-cap stocks with the remaining 20% in small-company growth funds will be a heck of a lot more volatile than one that has that other 20% in a total bond market index fund.

Keep in mind too that the volatility of a portfolio isn't just the sum of the volatility of its parts. Assuming you own different assets that don't all move in synch with one another, gains in some investments can compensate for setbacks (or smaller gains) in others. So adding a highly volatile asset doesn't necessarily increase your portfolio's risk by the volatility of that asset.

Depending on its correlation with other parts of your portfolio, a jumpy asset could actually act as a damper.

Which is why that any time you're talking about investment recommendations with an adviser -- or, for that matter, building a portfolio on your own -- you want to be sure you're not just looking at all the components in your portfolio, but at how those components interact with each other. (You can get a sense of how the riskiness of individual holdings compares with that of your portfolio overall by going to a site like RiskGrades.

All that said, I can tell you that while there's no Official Retirement Asset Allocation for Fortysomethings, a mix of anywhere between 80% and 90% in stocks and the rest in bonds is generally considered appropriate, with about 75% of the stock portion going into large-company stocks and the remainder into mid- and small-caps. And in fact, if you plug the ticker symbols for the target-date retirement funds for someone your age offered by major investment firms like Fidelity (FFTHX), T. Rowe Price (TRRJX) and Vanguard (VTTHX) into Morningstar's Portfolio X-Raytool, you'll see that all three funds pretty much fall within those parameters.

Of course, that doesn't mean you've got to be right in that range. Risk is personal thing and some people get more anxious about seeing their portfolio's value sink than others. So it would be a mistake to go 80% in stocks if you would be likely to dump your stocks during a market correction. If your stomach churns every time the Dow drops a hundred points or more, you might want to have a bigger cushion of bonds and cash in your portfolio.

At the same time, though, you don't want to take such a conservative stance you're likely to end up with an undersized nest egg at retirement. You need to arrive at a tradeoff that gives you a shot at decent long-term growth without making you feel that your portfolio, along with your retirement plans, could implode any day.

So in addition to looking at the riskiness of your portfolio in an investing sense -- how much it might go up or down in the short-term -- you also want to consider how different mixes might affect the eventual size of your nest egg, and the amount of money you can reliably draw on it throughout retirement. After all, the possibility that your investing strategy, combined with what you're saving, may leave you short of the resources you'll need for retirement is a risk too, arguably the most important one. You can evaluate that risk by checking out tools like Morningstar's Asset Allocator and T. Rowe's Retirement Income Calculator.

To sum up, you might want to think about checking out some of the tools I've mentioned with an eye toward assessing risk. Since you're working with an adviser, and presumably paying him or her for advice, you really ought to go back to that person to air your concerns. During that discussion, you can get a better breakdown of your entire portfolio. And while you're at it, it wouldn't hurt to have the adviser explain why he or she suggested that portfolio.

If you get the impression that the recommendation came more from a seat-of-the-pants feel than a well-thought-out quantitative process, then maybe in addition to re-evaluating your portfolio, you need to re-assess your adviser.