5 Reasons Why ETSs Are Good for Your Retirement
- Author: Chris Remington
- Posted: 2024-11-28
Americans are always looking for the best investment that can help them get the edge of retirement. Unfortunately, some people try to hit home runs in their IRA and take up much more risk than they should. Investors can take a different approach, opting for safer securities that still have the possibility of price appreciation. Exchange traded funds are one of the best retirement vehicles that can help you reach your goals. Here are five reasons why ETFs are a great investment for your retirement.
They Are Broad-Based
When you put an individual stock in your retirement portfolio, you obviously run the risk that the stock will decline in value. The hope if that you have constructed a diverse portfolio of stocks and bonds that can insulate you from some of the ups and downs of the market. The average investor may not be able to construct this type of portfolio on their own and may also not want to pay the fee that a money manager would cost. An ETF gives you a broad-based portfolio that exposes you to multiple stocks. Then, you can compose your own portfolio consisting of ETF's to reduce your exposure to any one stock or sector.
They Have Lower Fees
You would be surprised how much difference a 1% hike in fees can do to your retirement. The reason is that your retirement depends on the power of compounding, and fees reduce your compounding. Some mutual funds even charge you a commission when you buy the fund. An ETF will charge you as little as .23% in fees, and slightly more more an actively managed ETF. You will generally pay about .5% less for an ETF than a mutual fund. If you invest $1,000 now, the difference after 30 years between a 6.5% return and a 7% return is $1,000. In addition, you would also avoid the 150 basis points that a professional asset manager would charge.
ETFs Make Managing Your Own Money Easier
As an average investor, you may some difficulty picking your own stocks. There is a lot of information to process and thousands of stocks from which to choose. You can gain exposure to hundreds of different stocks and save yourself on transactions costs and fees when you put together your own portfolio of ETFs. Investorts do not need to spend their time and energy on stock picking. They can invest in a broad-based portfolio and not have to do any work. Then, they can make some tweaks in their mix of ETFs as they see fit. You would not need to follow the news from all of your stocks on a daily basis to stay on top.
They Can Pay You Money
Depending on the ETF that you invest in, you may be able to generate substantial dividend income for your retirement. This could supplement yours fixed income from your social security or your pension. Even a yield of 4-5% each year on your portfolio can be enough to give you substantial peace of mind during retirement. The dividend yield that you earn until then can even move up your retirement timetable by a few years. The dividend income that you receive before retirement will also compound assuming that you automatically reinvest the dividends. Dividend-paying ETFs can also help reduce some of the downside risks in your portfolio and cover you from some market losses. There are a number of higher-yielding ETFs out there that can help your portfolio.
Active Management Is Not Always Best
Two of the options that you have are to actively manage your own money or choose an ETF that is set to an index or a basket of stocks. When you choose an indexed strategy, you not only minimize transactions costs, but you also opt for a strategy that has been shown to outperform active management historically. This is your best bet for the long term. Finding a handful of indexes to track will certainly not lead you astray over time. On the other hand, picking an choosing stocks on your own can leave you in the hole if your investment acumen is not as sharp as you want. You can choose borad-based market indices such as the S&P and the Nasdaq-100, or you can opt for sector index ETFs. Either way, you can keep putting money aside and not have to worry about doing the hard work that investing entails.
