Personal Finance

2 Terrible Stocks for Retirees

Getty Retirees
Getty Retirees

Image source: Getty Images.

Though it might not seem like it, the wisdom of Shakespeare's line from Hamlet "to thine own self be true" applies to investing. As we age, our investment needs change. Recognizing this important truth can make the difference between enjoying a comfortable retirement and having to spend another few years in the workforce.

At younger ages, investors tend to focus on taking on relatively more risk than later in life in hopes of building wealth. As investors near retirement, though, their savings strategy often shifts to emphasize preserving capital, which can mean some stocks are better left avoided. In this article, I will highlight two popular stocks from The Motley Fool universe that retirees should avoid, and distill the broader investing lesson each represents.

Netflix Home Screen Page

Image source: Netflix

Netflix: Love the company, hate the stock

Netflix (NASDAQ: NFLX) is a classic Peter Lynch stock; Lynch popularized the "buy what you use" philosophy of investing. Given the incredible success of Netflix stock since its 2002 IPO and the company's pronounced brand awareness, retirees or older savers could be excused for considering its shares a shrewd investment. However, the problem with Netflix, or many comparable growth stocks, is that its aggressive valuation and highly volatile trading behavior make it ill-suited for investors focused on capital preservation.

This is all the more unfortunate because Netflix continues to prove doubters wrong by notching one impressive quarterly performance after another. As just one data point illustrates, the company has handily beaten analysts' earnings-per-share estimates in each of its four most recent earnings reports. Netflix is beginning to show signs of maturing as a company, particularly in its now-profitable U.S. segment. The company also remains heavily cash flow negative as it continues to spend hand over first to acquire new content rights, and is highly leveraged as evidenced by its debt-to-equity ratio -- roughly four -- which is largely owing to the company's sizable content liabilities. The overriding lesson here is that well-known and successful stocks might seem like attractive ideas for late-stage savers. However, given these companies' more accentuated risk profile, loss-averse investors would be better-served parking their cash elsewhere.

Foolish bottom line

Hopefully, the Netflix and NVIDIA examples help convey a broader message. Both companies are incredible organizations and certainly fan favorites here at the Fool. NVIDIA's dividend might make it seem appropriate for income investors, and Netflix's long-standing familiarity among many consumers might make it seem less risky than it is. In reality, though, both stocks carry unique risks that are poorly suited for retirees or those nearing retirement.

First impressions only go so far in investing. To truly understand whether a stock meets your needs, you have to delve deeper than a cursory glance. Doing so will also help you avoid taking unnecessary risks with your hard-earned nest egg. So while NVIDIA and Netflix are indeed great stocks, they also nicely embody exactly the kind of characteristics that make them terrible investments for retirees.

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Andrew Tonner has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Netflix and Nvidia. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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