A diverse retirement portfolio should include stocks. While generally considered high risk, stocks have proven throughout history to yield higher returns than bonds or any other investments.
Whether you’re just starting your retirement investing or diversifying your portfolio, there are important things to remember before buying stocks on your own.
Hire a professional
When purchasing stocks, it is customary to use a stockbroker. Brokers range in price based on their responsibility and level of involvement, and they are licensed to buy stocks on behalf of their clients for a commission. It is wise to ask around and do research on brokers, just like you would a doctor or mechanic.
Different types of stockbrokers
Types of brokers include:
- Money managers. Like skilled financial planners, money managers have complete discretion over your account. They handle large amounts of money and are generally used by individuals with very high incomes.
- Full-service brokers. These are more conventional stockbrokers. They will meet with you face-to-face, get to know your personal goals, and assess risk factors such as age, debts, marital status, and more.
- Online brokers. This is often the most economical choice. These brokers will give you basic assistance via the Internet or phone.
- Discount brokers. A step up from online, these brokers give you a bit more assistance for a higher fee.
Different types of stocks in which to invest
You can invest in a variety of stocks, mutual funds, index funds, and ETFs (exchange traded funds). You also have the option to buy individual stocks in one company. There are pros and cons to this, which you should discuss further with your broker.
When you purchase individual stocks, there are no ongoing fees once you’ve paid your broker, and you have more hands-on control. You can buy and sell whenever you want, and you can learn how the company in which you’ve invested operates. In general, individual stocks are riskier than other funds, but they often pay out more.
There is a downside to individual stocks, though. You don’t have an experienced broker guiding you, and if you’re invested in only one company and it goes belly up, you’re left with nothing.
If you want to invest in stocks but are looking for something a bit less risky, consider:
- Mutual funds. Mutual funds are a low-risk alternative to individual stocks. Your money is invested in many places, and the investor does not have to make individual purchases and trades. This diversification protects you if one of the companies doesn’t do well.
- Index funds. This is similar to a mutual fund, but it tracks a specific part of the market index—such as the S&P 500 or the NASDAQ—and replicates it. These funds can be costly to trade.
- Exchange traded fund (ETF): ETFs trade like stocks with the diversification of index funds. Costs of trading ETFs are lower than index funds, and they are lower risk because they have a mini-portfolio.
As usual, be sure to consult with a qualified financial professional to see if stocks make sense for your investment portfolio.
Jeff Rose is a Certified Financial Planner and Iraqi combat veteran. He blogs at Good Financial Cents, Soldier of Finance and Life Insurance By Jeff.
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