If you are designing an investment portfolio for your retirement, then it is important to understand which investments are appropriate. Some investments might be appropriate for a speculative investor, but do not belong in a retirement account. A retirement portfolio should consist of conservative holdings instead of very risky securities.
Below is an overview of the different types of investments that are commonly available and an explanation of why they do or don't belong in your investment portfolio.
These investments are the building blocks of your retirement portfolio. They are the lowest risk and should provide you with steady growth.
Blue Chips And Bonds
Blue chip stocks are the giants of the investment world. The companies have been around for a long time and/or have a market share in the billions of dollars. They are the exact opposite of fly-by-night penny stocks. They tend to grow slow and steady. Another bonus is that many blue chip stocks pay dividends. While you are working, you can have the dividends re-invested and purchase more stock. Once you retire, you can collect the dividends as cash for extra income.
Bonds are even more conservative than blue chip stocks. You can think of bonds as an i.o.u. from the government or a company. You are buying debt. The safest are government bonds, followed by highly rated corporate debt. The one type of bond you should avoid are junk bonds. These are bonds that pay a high premium because the company is considered a risk to repay.
One risk of owning a single stock, even a blue chip, is that it might drop in value. One way to protect yourself is to purchase a diversified fund. These are funds that are comprised of many different stocks. You can buy shares in these funds and in essence "own" several different stocks. You don't have to spend time researching hundreds of different companies; instead, all you have to do is select a fund you like. Some funds target a specific sector, such as consumer discretionary, while others are comprised of stocks from a specific market cap range.
These are investments that are fine for a young person, but the closer you get to retirement, they need to leave your portfolio.
Non-Dividend Paying Stocks
You should be careful about owning non-dividend stocks in a retirement portfolio. Sometimes these stocks are quality; however, you won't receive cash dividends. When you retire, dividends provide a fantastic source of extra income to supplement your social security or pension. If you own non-dividend paying stocks, you will have to sell them to realize any monetary gains.
These investments have no place in a retirement portfolio. The only place they belong is in a separate account that is designated for speculative investing.
Penny Stocks, Micro-Cap, and Long Shots
These tiny stocks are often brought by people because they expect them to break through and make huge profits. Sometimes these speculative bets can pay off, however they are still extremely risky. You should not have stocks in your retirement portfolio that are risky. You want to own stocks that have proven themselves, not those that have yet to demonstrate a track record.
For more information, contact an investment advisory company.