Investing in Stocks for Retirement

There is no certainty in investing, whether you invest in stocks, bonds, mutual funds or annuities.  But over the longer term, stocks have offered returns superior to almost every other asset class. When you invest for retirement, whether through your employer, an individual retirement account, mutual funds or other investments, it is important to understand stocks: what they are, how they work and how they help grow your portfolio.  On this page, we define “retirement stocks” as stocks that an investor purchases in their retirement portfolio.

Basics of Retirement Investments

We believe the single greatest determinant of long-term portfolio returns is asset allocation. A well-balanced portfolio generally has funds allocated among bonds, stocks, cash and other investments that work together to help meet your long-term financial goals. How should you define well-balanced? That depends on factors such as your life expectancy and that of your heirs, how much money you have saved, your risk tolerance levels and income and cash-flow needs. To enjoy a comfortable retirement as your individual circumstances may dictate, your portfolio may need to lean toward growth rather than income, which means you may need to allocate more of your funds to stocks because of their higher potential returns. But you would have to be willing to tolerate greater short-term volatility.

Retirement Stocks

Before deciding which retirement stocks to invest in, you should outline your retirement goals, income needs and time horizon. Once you have these set, you can then determine which retirement stocks are best to achieve your growth goals.   

Types of stocks 

Stocks can be either common or preferred. Both represent a slice of ownership of a company and both can pay dividends, but there is one important difference. While common stock holders are entitled to vote at shareholder meetings, preferred stock holders don’t have voting rights. To make up for their lack of voting rights, preferred stock is senior to common stock, which simply means their dividends are paid before common stock holders’ dividends are, and they are less likely to be cut or reduced though both can happen.

Many investors believe that dividend paying stocks are “safer" than non-dividend paying ones. However, that is not necessarily the case.

The stock market can be broken down into several categories. Take the MSCI World Index as an example. It has 11 sectors, which separate companies into groups based on the products and services offered by the particular company. The 11 sectors that make up the MSCI World Index are Information Technology, Health Care, Consumer Staples, Telecommunication Services, Financials, Consumer Discretionary, Energy, Utilities, Real Estate, Materials and Industrials.

There are individual indexes that track the performance of particular sectors. Investors can choose to invest in particular sectors, individual stocks or the broader stock market through exchange-traded funds (ETFs), index funds or actively managed stock mutual funds.

Investment style

Companies are often classified according to style—value or growth. Mutual funds are often divided into these different investment styles. Growth stocks are of companies likely to offer greater capital appreciation potential by growing their earnings faster than those of an average company. Value stocks are those that may be viewed as underpriced and have potential for price appreciation when the market reconsiders their earnings’ value.  

Market capitalization

Companies are further categorized according to their market capitalization or  rough size. Market capitalization is calculated by taking the number of shares outstanding and multiplying that number by the company’s current stock price.

  • Mega-Cap: Companies with market capitalization of over $100 billion
  • Large-Cap: Companies with market capitalization between $20 and $100 billion
  • Mid-Cap: Companies with market capitalization between $2 and $20 billion
  • Small-Cap: Companies with market capitalization between $250 million and $2 billion

Basics for Analyzing Stocks and Common Valuation Measures

When analyzing stocks, it is helpful to have evaluation metrics. Some common valuation measures include:

  • Earnings (Price-to-Earnings): The Price-to-Earnings ratio of a company, also known as the P/E ratio, is a well-known stock valuation metric. The P/E ratio can be used to determine how much a company is worth or can be aggregated for all stocks of a type or for the entire market. The calculation is simple: It takes the stock price of a company and divides it by the company’s earnings per share (EPS) for a designated period, often the previous 12 months. Investors often erroneously think high P/E stocks or high P/E equity markets are riskier than low P/E stocks or low P/E equity markets. But studies have shown that P/E, used on its own and no matter its level, tells you nothing about market risk or return potential.

Investors could also use a company’s earnings yield to evaluate its growth potential. The earnings yield is the inverse of the P/E ratio. To calculate earnings yield, EPS is divided by stock price. This figure is then expressed as a percentage. This ratio is useful because it can be used to compare returns against other investments such as bond yields, money market funds or certificates of deposit (CDs). The resulting percentage could determine if investors are getting a higher rate of return from investing in the stock market compared to the 10-year Treasury note.

  • Price-to-Book: The Price-to-Book ratio compares a company’s current market price to its book value. The book value of a company is the value of a company’s net equity by subtracting the company’s total liabilities from its total net assets as stated on its balance sheet. The Price-to-Book ratio is calculated by either taking the company’s market capitalization and dividing that by the company’s total book value or dividing the company’s current share price by the book value per share.
  • Price-to-Sales: This ratio, developed by Ken Fisher, can be more useful than the P/E ratio in identifying strong companies. That is because a company’s sales are generally more stable and can better gauge the strength of the underlying business of the company than earnings, which can be manipulated or massaged to appear better than they are. The formula for calculating the P/S ratio is the price per share divided by the annual net sales per share.
  • Dividend yield: The dividend yield is a ratio that, as a percentage, expresses the amount a company pays out in dividends each year relative to its share price. The formula for calculating dividend yield is the annual dividend divided by the current stock price.

Learn More About Investments for Retirement

Fisher Investments can help you craft a retirement plan that includes an appropriate allocation of retirement stocks in your retirement portfolio, based on your needs, time frame and assets. We will review various investment options and help select those that will increase the likelihood of achieving your long-term goals.

Contact us today to learn more.

Investing in securities involves a risk of loss. Past performance is never a guarantee of future returns.
Investing in foreign stock markets involves additional risks, such as the risk of currency fluctuations.