Coasting in Retirement – Episode 74
In this episode of Coasting in Retirement, Josh Null and Michelle Lee Melton-Null discuss a question many investors ask at some point in their financial journey:
Should investors hold individual stocks in their retirement accounts?
At first glance, this might seem like an easy question. But many investors may not realize that the majority, if not all, of their investment accounts are already invested in groups of stocks through vehicles like mutual funds and exchange-traded funds (ETFs).
For those with most of their retirement savings in qualified plans such as a 401(k), there’s a good chance that much of the portfolio is invested in target-date funds. In many cases, investors may not even have the option to hold individual stocks inside those plans.
So, the real discussion becomes whether it makes sense to allocate some portion of a portfolio to individual stocks, or whether investors should keep everything inside diversified investment funds.
Understanding the Basics: Stocks, Mutual Funds, and ETFs
Before diving deeper into the pros and cons, it helps to define a few key terms.
An individual stock represents partial ownership in a single company. Owning stock means you have a claim on the company’s assets and earnings. Unlike funds, individual stocks do not come with built-in diversification, which can mean both higher risk and a potentially higher reward and control.
A mutual fund pools money from many investors to buy stocks, bonds, and other investments. Professional money managers oversee these funds and decide which securities to buy and sell. Investors gain exposure to all the investments inside the fund and any income they generate.
An ETF (Exchange-Traded Fund) is also a pooled investment fund that holds a collection of assets such as stocks or bonds. ETFs trade throughout the day on an exchange like individual stocks. They offer diversification and flexibility, often allowing investors to gain broad market exposure in a single transaction.
Why Many Investors Use Funds
The general idea behind mutual funds and ETFs is diversification. By owning many companies inside one investment, the overall portfolio may be less affected if any single company performs poorly.
In a worst-case scenario, it’s unlikely that every stock inside a diversified fund will decline at the same time. The “law of averages” tends to smooth out some of the ups and downs.
The flip side is that it’s also unlikely that every holding will be a winner at the same time. As a result, even the best-performing mutual fund or ETF will typically trail the returns of the strongest individual stocks in the market.
Why Some Investors Choose Individual Stocks
There are several reasons investors consider holding individual stocks alongside diversified funds.
One argument is that market conditions sometimes create an environment where professional stock pickers may have an opportunity to outperform. In periods of high stock dispersion, where some companies perform very well while others perform poorly, careful stock selection can potentially produce stronger results.
Holding individual stocks can also provide several key benefits:
- Tax Control: Investors decide when to sell, allowing them to realize gains or losses strategically.
- Tax-Efficient Wealth Transfer: Appreciated stocks may receive a step-up in cost basis at death, potentially reducing capital gains taxes for beneficiaries.
- Higher Potential Returns: A single successful stock can outperform the average returns of diversified funds.
- Direct Ownership and Control: Investors know exactly which companies they own and can choose when to buy or sell.
- Dividend Income: Companies may pay dividends that can be reinvested or used as income.
- No Fund Fees: Investors avoid ongoing management fees typically charged by mutual funds and ETFs.
These benefits can make individual stocks appealing for investors who want more control over their portfolios.
The Risks and Considerations
While individual stocks offer advantages, they also come with important risks.
The biggest concern is lack of diversification. If too much of a portfolio is concentrated in a small number of companies, the impact of a single company’s failure can be significant.
Managing individual stocks also requires time, research, and ongoing monitoring. Investors need to stay informed about company performance, industry developments, and market conditions.
Another potential challenge is the speed at which investing information spreads today. News headlines, online platforms, and social media can create a constant flow of opinions, some helpful, some not.
Many modern trading apps are also designed to make buying and selling stocks extremely easy. In some cases, these platforms can resemble online casinos, encouraging frequent trading rather than thoughtful long-term investment decisions.
Finding the Right Balance
Because of these trade-offs, many investment portfolios combine both approaches.
At Gulf Coast Financial Advisors, portfolios often include a variety of ETFs alongside what is commonly referred to as a “stock sleeve.” This approach aims to balance diversification with the potential benefits of individual stock ownership.
The diversified portion of the portfolio helps manage volatility, while the stock sleeve can provide an opportunity to outperform the broader market and potentially stay ahead of inflation over the long run.
The Bottom Line
All investing involves risk, and having an all-stock portfolio may not be appropriate for many investors, especially those who are in or near retirement.
However, selectively holding individual stocks alongside diversified funds may provide additional flexibility, tax advantages, and the potential for stronger returns when done carefully.
As with most financial decisions, the key is to build a portfolio that aligns with your goals, your time horizon, and your tolerance for risk.
Want To Talk It Through?
You can reach us at 251-327-2124, or visit gulfcoastfa.com and click the blue button in the upper right-hand corner to schedule a meeting. We offer:
- 15-minute introductory calls
- 30-minute Zoom meetings
- In-person meetings at our offices in Fairhope, Orange Beach, or Mobile
No pressure. No obligation. Just a clear, professional conversation. Here’s to a strong, well-protected 2026, full of confidence and financial peace of mind on the Gulf Coast.
This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.