Safe Stocks for Retirement: Balancing Risk and Return

Safety becomes a greater investment priority for most people as they get closer to retirement. That’s a good thing, because the goal of investing shifts from accumulating and growing your account balance, to protecting your savings and providing a means of withdrawing money to cover retirement expenses. Your investments should reflect that change of focus.

For that reason, many retirees will look for safe stocks to invest in. These are often stocks whose returns have been relatively stable over time, have good fundamentals like low debt or higher earnings or have been in business for a long time and have a good reputation.

Let’s explore the idea of “safe stocks” and how you can manage your investment risk as you transition into retirement and seek more stability and income.

This question requires a little expansion before we can answer it completely. In short, yes, it’s critically important that you don’t invest too aggressively in retirement. It is equally important that you avoid investing in purely speculative stocks whose future returns are highly unpredictable.

However, the counter to those actions isn’t to identify stocks that are considered “safe” and invest only in those. We need to look more broadly at our portfolio as a whole and consider how the combination of stocks, bonds and other assets we hold interact with each other. This is what underlies the investing principles of diversification and asset allocation.

In general, value stocks are considered to be safer than growth stocks.

Owning stocks means you have an asset whose value can fluctuate, and that subjects you to the risk of loss. That fact doesn’t change when you invest in safe stocks. There is no guarantee that a safe stock will increase in value. Although “safe” stocks such as value stocks may not be as risky as growth stocks, they are not a complete investing solution, especially in retirement.

The main risk of relying on safe stocks isn’t that the stocks themselves are bad, but because concentrating too much on any one type of investment also means your risk exposure is concentrated. This is what we call undiversified.

To avoid that risk, you need to diversify your investments and hold a mix of different types of securities — called your asset allocation — that properly balance your return expectations and appetite for risk.

That means you should invest as aggressively as necessary to create the return you need to meet your goals, but conservatively enough to keep your risk in check and not stress yourself out. These two objectives are sometimes at odds with each other.

Diversification means holding different types of stocks that are affected in different ways by changing market conditions. Rather than only investing in safe stocks, it’s better to include other types of investments, even riskier ones, in order to create a well-diversified portfolio. This is safer than investing in safe stocks alone. An effective way to achieve broad diversification is to invest in index funds that track different indexes such as the U.S. stock market, foreign developed markets, emerging markets and domestic and foreign bond markets as well.

While holding a diversified portfolio will reduce the inefficient risks you are exposed to, your choice of asset allocation determines how aggressive your portfolio is. Less aggressive portfolios tend to be more stable over time but also have lower average returns. More aggressive portfolios are more volatile but the average return is likely to be higher.

The classic “retiree portfolio” is 60% stocks and 40% bonds. This works for a lot of people. However, you need to consider your own situation and attitude toward investing when choosing your asset allocation. You may need to adjust that up or down to fit you best.