Stocks are a fundamental building block of a successful retirement portfolio. In retirement, the potential return from stocks over time is more likely to outpace inflation when compared to the long-term returns from cash or bonds. Investing in stocks can be risky, though. Investors are met with a range of possibilities, each with their own advantages and disadvantages.
A stock is a share in the successes of a company. Basically, a stock holder owns shares issued by corporations that are a claim on the company’s assets and earning. As you acquire more stock, your stake in the company becomes greater.
Owning stock gives you the right to vote in shareholder meetings, receive dividends—which are the company’s profits—if and when they are distributed, and it gives you the right to sell your shares to somebody else.
If a company is doing well and the stock value increases, you always have the opportunity to grow your investment. The foundation of a stock’s value is directly related to company profits. So, as a shareholder, you are entitled to a portion of the company’s profits.
Stocks are often considered a necessary ingredient in an investment portfolio as they can increase your return more than other investments. Here are a few advantages:
While your return on your stock investment over time is quite good, it’s still important to diversity your portfolio and balance conservative and more ‘safe’ investments with the risk you take on when you invest in stocks.
Over the past 100 years, the stock market has produced close to an average 10 percent rate of return. Adjusted for inflation, that means stocks could potentially double the value of your money in just over ten years at their average long-term return rate. This does not mean, however, that you are actually earning 10 percent per year on your money. In fact, real ‘rate of return’ is a topic that is frequently debated among financial professionals as there are so many variables. It’s no secret that investing can be tricky, which is why it’s smart to do your research or enlist a professional financial advisor to help you navigate the market. Conservatively, you might assume an expected rate of return closer to the 7 to 8 percent range.
Publicly traded companies issue quarterly earnings reports to the Securities and Exchange Commission (SEC). According to Forbes’ financial services expert Stephanie Taylor Christensen, the material from these reports can help you evaluate a stock’s health:
Some figures can be more telling than others when determining a stock’s health and the best performing stocks, which is why an expert financial advisor’s help can be beneficial. Depending on your unique profile, you may want a specific type of investments for your portfolio, and many variables contribute to which stock make the most sense for your unique investment performance and growth strategy.
Stocks represent participation in a company’s growth. There are no promises about returns of your initial investment. In fact, the profitability of the investment depends on rising stock price, which is directly related to the performance and growth, or increasing profits, of the company. Buying stocks can be a bit of a gamble as you can’t always predict the successes of a company.
Here are the main disadvantages:
Stock values can change for no apparent reason, which can be quite frustrating for the investor who’s trying to anticipate the behavior of the stock based on the actual performance of the company.
Prices of stocks can be volatile. Prices can rise, be irregular and decline fast. Such declines sometimes cause investors to sell and panic, which results in loss.
Investors in a certain company might not know all that there is to know about the company. Due to this insufficient information, making an investment decision can be difficult.
While shareholders invest in a company, they don’t have the privileges and rights that the owners of privately held companies have.
Stockholders are the last ones to get paid since the company pays their employees, creditors and suppliers first.
Stockholders have tax implications.
Experts recommend allocating 40 percent or more of your portfolio to stocks during retirement to help sustain one’s standard of living for a 30- to 40-year period. Here are a few things to think about when investing in stocks:
Older investors have a shorter time horizon to recover from market volatility, so stock investments should be more conservative, to a degree. Target date funds are designed around expected retirement age. While they can be good for investors in the long run, there are some risks:
Most target-date funds are funds from one company, which may not have the top managers in each of the asset classes.
Investors give up control on where to overweight and underweight their investments.
If you have spare funds, you can afford more risky investments. A financial advisor can help determine your ideal level of investment risk as well as assist with the transition from high- to low-risk investments.
Asset allocation refers to the selection of securities and asset classes in which one can invest. It’s the same idea that you might hear referred to as “portfolio composition” or, more simply, “investing mix.” Asset allocation varies widely on a number of factors:
No matter one’s age, a diversified portfolio that includes large-cap U.S. equity, fixed income and international equity is ideal.
Gradually increasing your stock exposure is recommended to get the most return from stock investing. Consider enlisting a retirement financial advisor for expert direction on the market and your unique situation. Financial planners or fiduciaries can help you invest comfortably for retirement, no matter your age or budget.
With our trusted network of advisors, we’ll connect you with up to three established planners in your area.
The most reputable financial advisors for seniors are the ones who are not only knowledgeable and qualified about retirement planning and after-retirement financial strategizing, but also the ones you can trust. Learn 5 things to consider to help you find a financial advisor right for you.Read More
Learn 7 steps to help you find the best financial advisor for you. From understanding the different financial service offerings to verifying credentials and understanding the compensation; learn how to find a financial advisor you can trust with your money.Read More
Many Americans have wondered whether their financial advisor is a fiduciary as the investment world is plagued with conflicts of interest, obscure disclosure and an overall lack of transparency. A financial advisor who will act as your fiduciary can help eliminate many problems. Learn more.Read More