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Forget Penny Stocks: Why ETFs Are the Best Investments for Those Saving for Retirement

Investing in the stock market is one of the best financial moves you can make, especially as you’re saving for retirement. You’ll likely need to save several hundred thousand dollars or more to retire comfortably, and achieving that goal isn’t easy.

Whether you’re behind on your savings or are simply trying to earn significant investment gains 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 per share and are issued by very small companies.

Young man holding hundred dollar bills in front of his face.

Image source: Getty Images.

Although penny stocks are appealing because they’re inexpensive and there is potential to see explosive gains, they also carry quite a bit of risk. Because these stocks are primarily issued by small companies, they tend to be more volatile. You could see significant gains by investing in penny stocks, but you could also lose a lot of money.

When your retirement is on the line, that kind of risk can be incredibly dangerous. There’s another type of investment, however, that is much safer and can still help you achieve your long-term financial goals.

The advantages of exchange-traded funds

Exchange-traded funds (ETFs) are popular investments among those who want to invest in the stock market while limiting their risk.

In a nutshell, ETFs are large collections of stocks, bonds, and other securities all lumped together into a single investment. So when you invest in a single ETF, you’re actually investing in dozens or even hundreds of different securities at once. This diversification significantly limits your risk, because if a few of the stocks in the fund aren’t doing too well, your entire portfolio won’t take a nosedive.

Index ETFs are among the “safest” investments because they track certain indexes, such as the S&P 500 or the Dow Jones Industrial Average. Because those indexes are good representations of the stock market as a whole, as long as the stock market is performing well, your index ETFs will likely be performing well too. Even if the market takes a turn for the worse, historically, it has bounced back every time — meaning your investments should recover as well.

There are also plenty of niche ETFs that can help you take a more targeted investing approach while still limiting your risk. You can invest in ETFs that focus solely on tech companies, for example. There are also ETFs that focus on petcare companies, renewable energy, or e-commerce brands. No matter what type of companies you’d like to invest in, there’s likely an ETF for it.

Investing in individual stocks vs. ETFs

There’s nothing wrong with investing in individual stocks, and for many people, that type of approach can give you more control over your investments. But it does involve quite a bit of research, because you’ll need to ensure you’re investing in solid companies that will be around for the long haul. You’ll also need to invest in at least 10 to 15 different stocks, because throwing all your money into just one or two individual stocks could be a recipe for disaster.

If you’re willing to put the time and effort into investing in individual stocks, that can be a wise move. But if you’d rather take a less research-intensive and more hands-off approach, ETFs may be the way to go. ETFs can help your investments grow relatively quickly, but because you’re investing in many different stocks at once, you’re limiting your risk. It’s also easy to get started investing in ETFs, and you don’t need to be a stock market expert to begin.

Saving for retirement is one of the most important financial targets to work toward, and it’s crucial to ensure you’re investing in the right places. ETFs are an excellent investment option for many people, and they can help you reach your retirement goals.

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