How to Pick the Best Stocks for Retirement
Saving for retirement doesn’t end at retirement. With people living longer now than ever before, your retirement savings has to last more than two decades. Add to that the problem of lower retirement fund balances now that pension plans are nearly extinct, saving for retirement is more complicated than in the past. Continuing to produce income long after you stop working is key to having enough funds to last through the remainder of your life.
The Basic Rule of Retiree Investing
One of the basic rules that retirees have heard for decades is to ratchet back risk as they age. Going into retirement, a retiree’s portfolio is supposed to be heavy in bonds and certain types of mutual funds because they’re less risky than stocks. But this way of thinking has changed over the past couple of decades for three reasons.
Firstly, 401(k)s have made it harder to save enough. Employees with little financial knowledge are tasked with allocating funds to their retirement although they’re on a limited budget and they’ve not been trained on how to create a portfolio. Those factors have contributed to the underfunding crisis that has gripped the nation. Second, since the financial crisis of 2008, the stock market has been in a bull market that has produced massive gains for those who have invested largely in stocks. Finally, investors have become increasingly aware of fees associated with the products they choose. Individual stocks have no fees other than those that your financial adviser charges.
The trend toward more stock-focused portfolios isn’t going to change any time soon. How should a retiree go about choosing the best stocks?
Choose a Balanced Portfolio
Regardless of your stage in life, a balanced portfolio representing stocks with differing levels of risks is always the goal. If you think you have identified a stock that you believe will be the next Amazon or Apple, don’t shift your entire portfolio to that single stock. Maybe invest a very small percentage into the stock and leave the rest spread out among healthcare, technology, industrial and other sectors. Spreading risk throughout your portfolio is how the pros manage risk.
Embrace the Dividend
Nobody can predict the future with any kind of certainty. In fact, investors who make big bets based on what they believe the price of a stock will be in the future often lose. Something that’s much easier to predict is a dividend—the quarterly amount that some companies pay just for holding their stock. Verizon Communications pays a dividend of 4.5% annually as of February 2019.
That means that each year Verizon will pay you 4.5% of your entire investment just for holding the stock. Dividend yield is tied to stock price so expect it to change over time but dividends are relatively easy to predict. Retirees should embrace dividend-paying stocks as a core part of their portfolio.
Look at Funds
Unless you have a lot experience in the financial markets, picking individual stocks probably isn’t a good idea. Many financial advisers also shy away from individual stock picking and instead choose funds—either ETFs or stock-based mutual funds.
Exchange traded funds and mutual funds built on stocks combine large amounts of stocks into one fund. It’s like creating an entire portfolio while only purchasing one fund. Funds are a great way to create a balanced portfolio but picking funds means you have to understand fees. Because somebody has to decide which stocks belong in those funds, you will pay an administration fee. Some funds charge a lot while others don’t.
Look for passively managed funds and ETFs. These come with the smallest amount of fees and some studies suggest that they perform the best.
There’s Room for Bonds
As a retiree you should have products in your portfolio other than stocks. Bonds and bond funds should have a significant presence and for the more sophisticated investor, real estate and other alternative investments might make an appearance as well. The more complicated the investment types, the more skill and experience your financial management team should have and the more you will—and should—pay for management.
Pick the Right Financial Adviser
There are a lot of financial advisers out there specializing in different areas. Some are comfortable picking stocks while others may have pre-made portfolios based on your financial situation. If you wish to own a portfolio based on individual stocks and stock based ETFs or mutual funds, ask any potential money manager about their experience in this area. Ask them about their past performance and how they create a portfolio based on individual stocks and stock-based funds.
Following your vision, pick an adviser with proven knowledge, experience, and performance to manage your portfolio.