Thinking about playing a more direct role in managing your investments in retirement?
If you’ve never invested before, it can feel overwhelming or even terrifying. That goes doubly for retirees, who don’t have the luxury of time to replace losses with earnings.
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Fortunately, investing can be as simple or complicated as you make it. However, you definitely want to start simple as a first-time investor.
Stocks
You have two broad options for approaching stock investments: buying funds or picking stocks. One is a lot easier than the other.
Passive Funds
Sure, you could try to find some fancy managed mutual fund that aims to beat the market. But as a beginner, you want to keep it simple.
“As a first-timer, it’s much less risky to invest in a passive ETF that just mirrors a stock index,” advised Nicholas Stuller, CEO at BenFi.
For example, SPY is a fund that just mirrors the S&P 500. For even broader market exposure, check out VTI, Vanguard’s Total US Stock Market ETF.
If you do want to choose funds that don’t simply mirror a major stock index, do plenty of research first. “Morningstar is one of the best resources to get educated on which funds to select, generally diversified funds or ETFs,” said Stuller.
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Actively Picking Stocks
Most investment advisors don’t recommend picking and choosing individual stocks, especially as a novice investor in retirement. It adds risk to your portfolio at a time when you should be reducing it.
If you feel passionate about picking stocks however, invest in education before you start investing in stocks. Consume as much information as you can, from reputable blogs, podcasts, authors, and courses. Start with these tips for picking stocks as a novice.
Bonds
Bonds serve several roles in your portfolio. First, they provide stable income, usually at a fixed interest rate. You can live off that income in retirement. When the bond matures and pays back your principal, you can either reinvest it or put it toward living expenses.
Second, many bonds come with extremely low default risk. What are the odds that the US government will default on its Treasury bond payments? The same goes for most municipal bonds (which typically come with tax advantages) and for high-rated corporate bonds. Beware of low-rated “junk bonds,” however.
Finally, bonds have a low correlation with the stock market. A stock market crash won’t necessarily affect your bond holdings, and often, the stock and bond markets move in opposite directions.
As for how much of your portfolio to hold in bonds, there’s no magic rule. In the 20th century, financial planners often recommended the “Rule of 100” — subtract your age from 100, and keep that percentage of your portfolio in stocks and the rest in bonds. In the 21st century many advisors have stopped recommending it, and instead urge their clients to stay in stocks longer into their career.
Stuller recommends getting expert advice to determine your own ideal asset allocation. “Work from a written financial plan from a reputable financial planner so that you know exactly how much money should be dedicated to investments,” he said.
Real Estate
Many retirees like adding real estate to their portfolios. It can hedge against inflation (unlike bonds), generate ongoing income, appreciate over time and provide tax advantages.
But there are near endless ways to invest in real estate, some far easier than others.
Passive Real Estate Investments
“Investing in real estate is a great way to generate wealth through additional income streams and equity building,” noted Ryan Barone, co-founder of RentRedi. “Retirees who want to invest minimal time and effort are a good fit for private equity real estate syndications or funds. The companies that manage the funds or syndications will handle all of the details, making your investment a truly passive one.”
Real estate syndications can generate high returns with great tax benefits, but they come with real risk. Most also typically require a high minimum investment — think $50,000 or $100,000. Consider joining a passive real estate investment club to go in on these with other, more experienced investors to reduce exposure and risk.
You can also explore publicly traded REITs, but beware that they share an uncomfortably high correlation with the stock market at large. That reduces their value as a way to diversify your portfolio.
Active Real Estate Investments
“If you are willing to put a little more time and effort into real estate investing, you can purchase and manage your own long- or mid-term rental properties,” added Barone.
However, becoming a landlord requires more work and skill than most people realize. It involves dozens of micro-skills, such as learning how to find good bargains on properties, forecasting cash flow, arranging financing, managing contractors, pulling permits, working with city inspectors, screening tenants, filing evictions and more.
From there, active real estate investing only gets harder. “House flipping will require a lot more active participation, as it can be quite time-consuming to acquire, renovate and sell properties on an accelerated timeline. But for some retirees, this can be therapeutic and make for a good hobby or post-retirement gig.”
Seamus Nally, CEO of TurboTenant, recommended starting low and going slow. “My advice for first-time investors who are retirees would be to start small. Real estate investing can end up being not quite so passive depending on your investment and what it requires of you, so to discern whether or not it’s something you like and can handle, don’t bite off more than you can chew from the get-go.”
Final Thoughts
You don’t need to choose between going it alone or hiring an investment manager to handle all your investments.
Instead of opting for one of those two extremes, consider starting with a flat-fee financial planner or advisor. You can pay for an hour or two of their time to get personalized advice and form a plan.
Alternatively, you can explore robo-advisors and human hybrid advisors. For example, Charles Schwab offers a free robo-advisor with an optional human hybrid upgrade for a flat monthly fee.
Start simple, and when in doubt, opt for passive investments over active ones.
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This article originally appeared on GOBankingRates.com: 5 Ways for Retirees To Find Success as First-Time Investors
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
