Retirees need to have at least some of their money invested in the market, but that can be easier said than done if you don't like picking stocks or are worried about the volatility in the current market due to COVID-19.
The good news is, you don't have to find yourself with a second career as a stock expert in retirement to ensure you've got sufficient equity exposure in a well-balanced portfolio that presents a reasonable level of risk. You can just invest in index funds instead.
Index funds are investments that track market indexes, generally by investing in all of the components included in whatever index they're tracking. There are index funds that track the performance of the S&P 500, the Nasdaq, large caps or small caps, international stocks, specific industries, and even bonds. Here are three reasons why buying into some of them can be the ideal move for part of your retirement account money.
1. Index funds limit risk and make diversification easy
Retirees can't afford to take a lot of risk because most will need their money soon, don't have forever to wait for a market recovery if a crash happens, and can't just go back to work to make more money if they sustain investment losses.
It's possible to limit risk by investing in individual stocks if you take the time to ensure your portfolio is balanced and that you don't over-invest in any one particular company or industry. But that can take more effort than retirees want to expend. If you want to reduce the chances of losses and easily diversify your portfolio by making just one or two purchases, index funds can make that happen.
You could invest in an S&P 500 index fund and a bond index fund and would have a pretty diversified portfolio that presents a limited risk since you'd own a mix of bonds and stock in 500 of the largest publicly traded companies on the U.S. market.
2. You don't need to be an expert investor or devote a lot of time to managing investments
Picking stocks can sometimes enable you to beat the market and earn amazing returns -- if you are willing to put in the time to research buying opportunities and make sure the companies you're buying stock in are poised for growth. But many retirees consider stock picking to be work and don't want to spend their leisure years doing another "job."
If you don't enjoy picking stocks or don't have the know-how to do so, index funds make investing virtually effortless. Sure, you'll need to research your options and find a balanced mix of funds that charge low fees, but this takes minutes rather than hours.
3. Index funds charge low fees
Investment fees can always eat into your portfolio, but this becomes an even bigger problem when you're a retiree on a fixed income.
If you don't want to spend a ton of money paying a professional fund manager to pick investments for you, index funds are the way to go. Since index funds just invest in the stocks they need to in order to track an index, there's no need to pay the high costs often associated with having a financial professional personally choose investments.
Are index funds right for you?
Index funds aren't right for everyone. If you enjoy picking stocks and are willing to put in the time, you can often do better by building a portfolio yourself of companies you believe in.
But if you simply don't want to be bothered with making investment decisions in your later years, putting an appropriate portion of your portfolio into index funds is an easy solution to making sure you have sufficient equity exposure as a retiree.