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