Investment Options within your Retirement Accounts

Initially, this information was going to be nestled in snugly with the Types of Retirement Investing post, but there was just too much to fit in, so I split it up a bit more. Just like there are different types of retirement options to choose from, there are also a lot of different options to choose from when creating a portfolio. Simply put, your portfolio is your combination of funds (like stocks and bonds) in your retirement account. You can build your portfolio with any combination of these, but to do that, you actually need to know what each one is. That’s where I come in!  

FUNDS

As a whole, funds are a group of various stocks or bonds. They are convenient because they allow people to buy a percentage of many stocks rather than buying individual stocks. Funds can follow certain sectors like tech or the environment.

For example, you could use $314.96 and buy one Apple stock. If Apple stock rises, you’ll earn some money. If the stock falls, yours does too. If Apple goes bankrupt, there goes your money.  On the other hand, you could take that $314.96 and invest in a technology fund. With that money, you’re buying pieces of a lot of different tech stocks. You still have Apple in there, but maybe $2.50 worth instead of $314.96. If Apple goes bankrupt, you lose that $2.50, but the rest of your money is spread across other companies. Funds are the stock equivalent to not putting all your eggs in one basket.

There are also funds that follow certain market indicators like the S&P 500 Index or the Dow Jones Index. The S&P 500 tracks the performance of a collection of 500 of the largest businesses across industries. By seeing how these companies perform, we can see a snapshot of how the whole stock market is performing. The Dow Jones is similar in that it tracks the performance of large companies, but it tracks 30 rather than 500.

ETFs

ETF stands for Exchange Traded Fund. In an ETF, you have a collection of stocks in a specific fund. There are ETFs that follow market indicators, specific industries, small businesses (small cap), large businesses, and more. You can buy and sell ETFs like you would with regular stocks. ETFs are generally very cheap (when dealing with fees) and offer lower rates and commissions.

Mutual Funds

A mutual fund is very similar to an ETF in that it is a collection of stocks that can be sold and traded. However, mutual funds do not see the same price fluctuations as ETFs because they can only be bought or sold once per day, after the market closes.

Mutual funds are actively managed by a human (aka a money manager or broker) who buys and sells. Because of this, they can have higher fees. An Index Fund is a particular type of mutual fund designed to follow a certain market index (like the S&P 500 or the Dow Jones)

Bonds

With bonds, you are buying debt, usually from the government but you can also buy bonds from a company. Bonds can be bought and sold in a similar way to stocks. There are bond ETFs and individual bonds.

When you’re young, it’s suggested to have more money in stocks because you have a lot of working years ahead and can handle the risk. As you get older, you invest in more bonds because they’re generally more stable.

REITs

REIT stands for real estate investment trust. With a REIT, you’re investing in a company that primarily deals (more than 75% of their business) with real estate. REITs provide a way to invest in real estate without actually going out and buying property. They also cover a broader range of real estate than what you’d typically think of (homes), like business real estate (offices and hotels). REITs can be bought and sold like stocks.

Stocks?

To be honest, I wasn’t completely sure that you COULD invest in individual stocks with your retirement account, but The Balance told me you can. I don’t think stock picking your whole retirement account is necessarily wise (because individual stocks can be so volatile), but it could be valuable to put a small amount in individual stocks to learn a little bit more about how the market works.

A Note on Diversifying

When dealing with investments, you often hear the word diversify. Like your college admissions brochure probably shows, diversifying is all about making your portfolio have different parts. You don’t want all your money in stocks or bonds or REITs or funds; you want it spread across the market.

There are a lot of different theories about diversifying, but I’ll lay out some advice for a young inexperienced investor.

1. Funds are your friend. Those funds I mentioned earlier have diversifying built in! Woo!
2. The younger you are, the higher your risk tolerance can be. Generally, stocks are more “risky” than bonds; the prices rise and fall more easily, but the potential for return (earning money on your investment) is greater. If you’re young, you can have a higher percentage of your portfolio (75-80%) in stocks. If there is a downturn, you have time to recover. As you get older, you can slowly convert to having more bonds.
3. Don’t try to stock pick! When people think about investing, they often think about buying into stocks of big companies and watching their money grow. Please don’t buy tons of Delta stock because prices are down due to a global pandemic (I’m looking at you, coronavirus). See #1 funds are your friends!
4. Avoid timing the market. Similar to three, don’t just invest money when you think prices are low. Invest consistently, and you’ll take advantage of the market when it’s low and still be okay when it’s high.

So, you see, there are a LOT of ways you can decide to invest your money. For a younger investor, it makes the most sense (to me) to invest a high percentage of your portfolio in a broad stock market fund then leave it alone! Your diligence in investing early will pay off more than stock picking or timing the market ever could.