Investing in the stock market is one of the best financial moves you can make, especially when you save for retirement. You probably need to save several hundred thousand dollars or more to retire comfortably, and achieving that goal is not easy.
If you’re behind on your savings or just trying to make significant investment returns in a relatively short period of time, you may be tempted to invest in penny stocks. The Securities and Exchange Commission (SEC) defines penny stocks as securities that trade for less than $ 5 a share and are issued by very small companies.
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Although penny stocks are attractive because they are inexpensive and there is potential to see explosive gains, they also carry some risk. Because these shares are mainly issued by small companies, they tend to be more volatile. You could see significant gains from investing in penny stocks, but you could also lose a lot of money.
When your retirement is at stake, that type of risk can be incredibly dangerous. However, there is another type of investment that is much safer and can still help you achieve your long-term financial goals.
The Advantages of Exchange Traded Funds
Publicly traded funds (ETFs) are popular investments among those who want to invest in the stock market while limiting their risk.
Simply put, ETFs are large collections of stocks, bonds, and other securities, all bundled together into one investment. So when you invest in a single ETF, you are actually investing in dozens or even hundreds of different stocks at once. This diversification significantly limits your risk, because if some of the fund’s stocks do not perform too well, your entire portfolio will not plummet.
Index ETFs are among the “safest” investments because they track certain indices, such as the S&P 500 or the Dow Jones Industrial Average. Because those indices are good representations of the stock market as a whole, as long as the stock market performs well, its index ETFs are probably doing well, too. Even if the market worsens, historically, it has bounced back every time, meaning your investments should bounce back, too.
There are also many niche ETFs that can help you take a more specific investment approach while limiting your risk. You can invest in ETFs that focus solely on tech companies, for example. There are also ETFs that focus on pet care companies, renewable energy, or e-commerce brands. No matter what type of companies you would like to invest in, there is likely to be an ETF for it.
Invest in individual stocks versus ETFs
There is nothing wrong with investing in individual stocks, and for many people, that kind of approach can give you more control over your investments. But it does involve a lot of research, because you will need to make sure you invest in solid companies that will be around for the long term. You will also need to invest in at least 10 to 15 different stocks, because investing all your money in just one or two individual stocks could be a recipe for disaster.
If you are willing to invest the time and effort in investing in individual stocks, it can be a smart decision. But if you prefer to take a less research-intensive and more practical approach, ETFs may be the way to go. ETFs can help your investments grow relatively quickly, but because you are investing in many different stocks at once, you are limiting your risk. It’s also easy to start investing in ETFs, and you don’t have to be a stock market expert to get started.
Saving for retirement is one of the most important financial goals to reach, and making sure you’re investing in the right places is crucial. ETFs are a great investment option for many people and can help you reach your retirement goals.
