Woodstock Financial Advisor – Third Act Retirement Planning —

What Are The Best Stocks To Invest In For Retirement?

Today in this article, we’ll discuss the best stocks to invest in for retirement. Perhaps you’ve read some articles or seen newsletters wherein “experts” set out to cherry-pick the best stocks, but we’re not going delve into specific stocks today. Quite frankly, I simply have no idea which stocks will perform akin to, say, how Apple has over the last 20 years. I don’t think anyone does! Rather, what I do want to talk about are the best stocks overall to invest in for retirement.

Specifically, there are two different types of strategies I’d like to review for those of you interested in reaping the benefits of prime global stock market investments. It’s important to understand that these two strategies, I believe, are superior options for most investors and how you spend a large chunk of your money. Let me clarify what I mean by that. For example, perhaps someone with a tremendous amount of money or an ample portfolio seeks to divert a small portion of those funds to trade “for sport,” just to see if they can boost their earnings even more. Or maybe they have a larger portfolio and want to put money into a penny stock or something else fun like that because they can afford to take a minor loss. Either which way, these strategies might be okay for investors looking to become a better steward .

This article will not only address those of a high net worth above $5 million or affluent people worth $1 million to $5 million, but it will also discuss the best investments for people with portfolios as small as $10,000. Regardless of your financial stature, we’ll talk about how to invest the bulk of your money in securities or actual stocks.

Low Cost ETF and/or Mutual Funds for Stocks

The first strategy represents a simple yet effective way to invest in the global stock markets. While you want to earmark most of your money for US markets, international stocks present a great opportunity as well. One simple way to do that is to rely on ETFs or low-cost mutual funds. Some of my favorite companies for these types of investments include Dimensional, Vanguard, and Schwab. Low-cost ETFs are also available through solid outfits such as SPDR. These four specific companies offer quality low-cost stock market investment opportunities. Now, at the same time, you want to be very careful and avoid buying more than one of the same types of investments, thereby making a firm decision about which strategy to employ.

For example, within the US stock market, you’ll have to decide whether to buy just one ETF or mutual fund that covers the entire market. In the event that this happens, there’s simply no need for you to buy more as these types of securities represent a US stock investment that covers small-cap, large-cap, and midcap value, blend, and growth. The same holds true for total foreign stock markets, which encompass all company sizes and valuations, meaning value, blend, and growth, as well as varied sectors. For example, a sector could be something like communications, healthcare, or financial services. These types of companies offer more US stock market choices than observed among their international counterparts. Keep that in mind as you’re examining ETFs, as the types of companies I just listed may in fact not offer a total foreign stock market option.

Another strategy you can employ if you’re solely investing in ETFs and mutual funds is to go in and say, “Okay, I’m going to buy one US large-cap ETF or mutual fund, one mid-cap ETF or mutual fund, and one small-cap option.” It’s important that you turn to one of the four providers I mentioned earlier in this article or find another similar company that offers low-cost funds you can invest in. Part of the magic in the specific companies I recommended lies in their low cost, which directly correlates to long-term performance. To aid our understanding of this concept, let’s compare low-cost funds to turnovers in football games. Typically, whichever team has fewer turnovers is more likely to win the game: a notably strong correlation with respect to football game stats. Of course, it goes without saying that a far superior team will probably beat an inferior opponent even if they don’t turn the ball over at all. But I digress… 

This strategy can be used for foreign investments, which are a little bit different. In this scenario, you’ll want to buy if you can’t find a total foreign stock market , which I believe Vanguard does in fact have. It’s very simple. You will buy an ETF or low-cost mutual fund from the developed world (referred to as an EAFE), as well as another from emerging markets. You’ll invest a greater sum in fully developed European and Asian countries than you will in emerging ones like Indonesia. This is essentially a general overview of how to invest in the stock market using only ETFs and mutual funds.

Moving on now, I would recommend that you avoid buying different funds from different families. For example, if you choose to buy the total stock market from Vanguard, employ that for all of your accounts—rather than, say, using the Schwab total US stock market ETF as well, which will result in company overlap across both funds. This is unnecessary, as there is enough diversification present with thousands of stocks, so it would be unwise to buy different ones. In this manner, you can literally get away with using two funds to cover the entire global stock market: one for the total US stock market and one for the total foreign stock market. You could also employ another strategy and rely on a total of five ETFs or mutual funds: US large-cap, midcap, and small-cap, as well as one foreign for developed nations and one for emerging markets. This ratio reflects the desire to allocate more of your money for US rather than foreign investments.

Rule #1 of Building a Stock Portfolio

Another investment strategy that will probably bump up your earnings over time and help cover your investment advisor fees—if you choose to work with an investment advisor rather than using a more passive approach—is to actually select individual stocks rather than use low-cost mutual funds. This approach requires careful consideration, as it is not merely about reading articles and choosing stocks that are hot at any given time. Rather, you want to work with stock fund managers who have a proven track record. Let’s discuss some of the things you should look for and general “rules” to consider when building a stock portfolio.

Rule No. 1 is to avoid overlap. Overlapping styles and holdings, even among managers, leads to closet indexing and increased cost—both of which reduce returns. In the event of an overlap, here’s what I often observe when reviewing a client portfolio: He or she will come in with many ETFs and mutual funds and maybe even a few stocks. One specific stock—for example, let’s say Coca-Cola—is owned in a bunch of different positions. The client may have funds from Fidelity and Vanguard, and perhaps SPDR. He or she may have some power shares in their along with 10 or 20 different funds, with one stock held in 10 or 11 of them. This is the perfect example of hyper-diversification, which is a systematic problem and completely unnecessary.

Another problem we observe with overlap is that when clients get into a fund, they sometimes have stocks that really shouldn’t even be in there. You’ll see a stock labeled as a large-cap growth fund, but the reality is that only 32%  of stocks are truly large growth. Perhaps there are some micro-cap stocks in there as well, and you’ve got small-cap stocks that could constitute 20% of a large-cap growth fund. So, it would be completely normal for me to examine a large-cap growth fund and see that small-cap comprises 20% of the fund, with a large portion in value as well. Beyond this, one-third could be value in a large-cap growth fund.

With this in mind, you want to be very careful—as we touched on before—when buying ETFs and low-cost mutual funds: selecting either two or five. One reason for this is to avoid the overlap that we just discussed. If you get into only mutual funds that are advertised as large-cap growth funds, you need to ensure they don’t have a bunch of holdings in other categories that are value or small-cap. As the average actively managed mutual fund has between 36-1,000 holdings, a corresponding portfolio can lead to significant overlap, hyper-diversification, style redundancy, extra taxes, and transaction costs.

That is what happens when style overlap occurs. Let’s say you have actively managed mutual funds with hundreds of total holdings across three different funds. One says they’re small-cap value, but they have large-cap growth in there. One says they’re large-cap growth, but they have small-cap value and micro-cap stocks. Finally, another says they’re midcap and, of course, they have large and small cap—just too many. This leads to those five ramifications we had mentioned earlier, which I’ll review one more time: significant overlap, hyper-diversification, style redundancy, extra taxes and transaction costs.

When investors go in to sell a stock, for example, many still don’t understand subsequent transaction costs even if their account is not being charged for the trade. Say they decide to sell shares of Microsoft. Well, if they have overlap across three funds that all hold Microsoft—because those particular funds are not strict nor disciplined in the category they’re investing in—they can decide to sell Microsoft in all three funds. Those three sales will in turn generate three transaction costs across three different funds—overlapping investments that should have never happened in the first place. This also represents three times the trading cost of what it would’ve been had they not overlapped across subpar mutual funds residing outside of their style because they decided to stray. Not only this, but these investors also face increased taxes given this transaction that occurred within three different mutual funds.

As a final note, always remember that taxes are paid at the mutual-fund level before the net returns ever even reach you, the investor. So now, once again, you’re hit with three times the amount of taxes and three times the transaction costs: an unfortunate but frequent occurrence when mutual funds overlap.

In our next article, we’ll discuss other investing rules when seeking the best stocks for retirement. To learn more about the difference between asset and wealth management click here.


If you would like to seek out my advice about your portfolio or get a free evaluation of your stocks, click on this link and set up what we refer to as a “retirement ready” success call. There’s no cost or obligation, and I would be happy to review where you are now, where you want to be, and share some tips that have worked particularly well for some of my clients.

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