Retirement Stocks: Investing for a Secure Financial Future
What are Retirement Stocks?
Retirement stocks are stocks for your serious money—the money you need to invest to fund a comfortable and prosperous retirement. The ideal retirement stock is a well-established, higher-quality business, with a more stable share price and a lower risk of suffering permanent loss.
Why Should You Invest in Retirement Stocks?
As you shift from accumulating wealth to relying on it, the stakes are higher, and the margin of error is smaller. For investors in or nearing retirement, avoiding severe losses is paramount. If you lose 50% of your portfolio, you need a gain of 100% just to get back to even. And if you lose 80%, you need a 400% gain before you are in the black.
Years ago, when you still had decades of saving left to do and the safety net of a regular paycheck to fund living expenses, stock market crashes may have seemed like a minor inconvenience.
As retirement gets nearer, this changes radically. Your emotions around money intensify. Your quality of life in retirement very literally depends on your retirement portfolio. A 50% plunge in your nest egg due to a stock market crash is no longer a minor setback, but an event with serious life consequences.
How to Avoid Severe Losses in Retirement
The most common way I see investors suffer severe losses in their retirement stock portfolios is a surprisingly straight forward one. They invest too much in speculative stocks. Speculative stocks are lower-quality companies and/or those with highly unstable share prices.
There are at least two problems with investing your retirement money in speculative stocks: 1) speculative stocks are more prone to fail; and 2) investing in speculative stocks promotes emotional decision making that can lead to financial ruin.
Failure and financial ruin typically aren’t the words you want associated with your retirement portfolio. Retirement stocks can solve both of these problems.
Retirement Stocks Lower your Risk
When we take the 1,000 largest stocks in the U.S. and separate out the most speculative stocks, we find a marked improvement in risk and return. The group of stocks that is left over after eliminating the speculative stocks is what we call our retirement stock universe.
Over the last 20 years, an equally weighted portfolio of stocks in the retirement stock universe would have outperformed a similar portfolio of the big-speculative stocks we eliminate by over five and a half percentage points per year. Over a 30-year retirement, that return gap leads to a difference in wealth that is off the charts. ($6.8 million assuming a starting portfolio of 500K with 10% and 4.5% returns).
The retirement stock universe portfolio was also much more stable over this period than the portfolio of large-speculative stocks. In down quarters for the stock market, the large-speculative stock portfolio lost an average of 11%, compared to a much smaller 5.7% for the portfolio of retirement stocks.
What is the Best Way to Invest in Retirement Stocks?
Naturally, there is no reason to buy every stock in the retirement stock universe to achieve these results. Some stocks are better buys than others, depending on when you invest. Perhaps some stocks are more timely, or they offer better value, or they are simply better businesses.
To narrow down the universe of retirement stocks that are the most attractive, we developed Retirement Stock Ratings®.
Retirement Stock Ratings®
The Retirement Stock Ratings® system evaluates all stocks in our retirement stock universe on a variety of factors we have found to result in better investment outcomes. We look at timeliness, value, dividends, and sentiment, among other factors.
Each stock receives a letter grade. Just like in school, the As and Bs, are desirable. The Ds and Fs should be avoided.
The chart below shows the performance of As and Fs vs. the entire universe of 1,000 stocks we start with. The chart assumes equal weighting and monthly rebalancing. These results are based on a simulation and do not account for transaction costs or fees.
The Retirement Stock Ratings® system offers a powerful tool for identifying the most attractive opportunities in our retirement stock universe, helping you make informed decisions. You can read more about our Retirement Stock Ratings® here.