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Ask a Fool: Are Small- and Mid-Cap Stocks Too Risky for Retirement Accounts?

By Matthew Frankel, CFP® – Apr 5, 2019 at 12:00PM

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You can invest in exciting stocks in your IRA -- just keep these rules in mind.

Q: I recently started contributing money to an IRA, and so far, most of the stocks I've bought have been small- and mid-cap growth stocks. Is this too risky to do with retirement savings?

Not necessarily, but there are a few things to keep in mind.

First of all, high-growth stocks are best suited for investors with a long time horizon. Not only does this give you time to ride out the ups and downs of a relatively volatile portfolio, but it also gives you time to recover if one of your small-cap stocks doesn't pan out.

So if you're 25, there's nothing inherently wrong with a retirement portfolio that's mostly composed of small- and mid-cap growth stocks. If you're 60, it's another story. In short, the closer you are to retirement, the greater your allocations should be to blue chip stocks and fixed-income investments.

Second, when it comes to investing in small- and mid-cap growth stocks, diversification is extremely important. If you have your money spread across 15-20 solid, well-run growth stocks, you aren't too reliant on any one stock, but will still experience some nice gains if one of them turns out to be a home run. On the other hand, investing in just three or four of this type of stock can be great if you're right, but can be devastating to your financial future if you aren't.

Relatively volatile growth stocks can certainly have a place in your retirement portfolio (I have a few in my own). However, it's important to maintain an age-appropriate asset allocation strategy and to not commit too much of your money to any one stock.

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