Heading into your early 60s can be a stressful time as a retirement investor. Hopefully, your prudence has paid off and you are sitting on a reasonable nest egg for retirement.
Most financial advisors now would steer you away from the stock market toward a heavy fixed-income portfolio. For many years, this was solid advice.
The stock market does have an unfortunate tendency to fall in dramatic fashion just before major life changes, such as retiring or taking out money to pay for your kids’ educations.
If you are a buy and hold investor, it only gets harder to hold individual stocks as important dates near. You find yourself poring over the finance news, looking for information on the prospects of your key holdings.
If you haven’t been investing using index funds or index ETF funds all along, now might be a good time to consider a switch. Here are the reasons why:
1. Reduced concentration risk
Owning the whole stock market through ETF funds such as the SPDR S&P 500 ETF Trust (SPY) gives you exposure to equities without the emotional risk of having all of your eggs in two or three single-stock “baskets.” An entire sector can collapse and it really won’t harm your position so dramatically that you feel like selling. It’s like insurance against overreacting.
2. Easier, more precise rebalancing
If you run a balanced portfolio, using ETF funds gives you a a simple way to sell off gains while buying back into investments that are temporarily out of favor, that is, rebalancing. You can do that with individual stocks and bonds, but your personal attachment to them can be a roadblock.
3. Less tax complexity
If you own your investments in an IRA, this is less of an issue, but taxable accounts should use ETF funds for the tax advantages they offer. Within each sector they track, these funds can stay balanced across a given index without creating taxable gains you must then track.
4. Higher liquidity
If you own only giant blue chips, selling when you need to sell is less of a problem. But if you own small caps or foreign stocks, the gap between the price at which you want to sell and the price at which buyers want to buy can be quite wide. Fix this by sticking to broadly held ETF funds, such as the iShares Russell 3000 Index (IWV), Vanguard Emerging Markets Stock ETF (VWO) and Vanguard Total Bond Market ETF (BND).
5. Low costs
What else do widely held ETF funds have in common? They are typically very inexpensive to own, featuring very low management fees and, depending on your broker, low or zero commission rates for trades.
Keeping costs down matters a lot, even for near retirees. Chances are, you’ll live 20 years or more in retirement, so minimizing investment costs helps you to maintain the value of your portfolio over time.