Why Buying Individual Stocks in Your Retirement Account Can Be Too Risky
07/02/25
When it comes to saving for retirement, investors can be drawn to the potential of big returns from individual stocks. But placing too much emphasis on single stocks in your IRA or 401(k) can expose you to significant risk that can be hard to recover from, especially as you near retirement. It doesn’t mean you can’t do it, and it doesn’t mean that it won’t work out, but I believe the risks outweigh the potential rewards.
Here are a few key reasons why ETFs or mutual funds are often safer choices:
1. Diversification
Buying individual stocks means your portfolio may be heavily reliant on just a few companies. If one of them underperforms — or worse, goes bankrupt — you could lose a substantial portion of your nest egg. Even non-financial events like the resignation of a CEO can affect stock prices. Mutual funds and ETFs, on the other hand, spread your investment across dozens or hundreds of securities, reducing the impact of any one company’s decline.
2. Volatility Can Hurt More in Retirement Accounts
Retirement accounts are meant to grow steadily over time, and ideally, to provide reliable income in your later years. Individual stocks can be extremely volatile. A sharp drop in a stock’s price could delay your retirement plans and slow down your timeline to start making withdrawals.
3. Difficult to Manage
Most people don’t have the time, tools, or expertise to research and actively manage a portfolio of individual stocks. ETFs and mutual funds are managed by professionals who have a track record, making them more predictable investments. That can mean fewer costly mistakes and less stress over time.
4. Taxes
One reason why stocks, rather than ETFs/mutual funds, can be more effectively used in a non-retirement account is that it’s easier to control the tax implications. In a retirement account, though, taxes from trades are not a concern since it’s under the umbrella of a qualified retirement account. The ETF or mutual fund you’re invested in can buy/sell as much as it would like, and it won’t trigger a taxable event.
5. Time Horizon Matters
The closer you are to retirement, the less time you have to recover from a bad stock pick. A fund that includes hundreds of companies is far more likely to recover from a downturn than a single company that misses earnings or faces regulatory trouble.
Conclusion:
It’s not that individual stocks have no place in any investment strategy, but for most people, they don’t belong at the core of a retirement portfolio. ETFs and mutual funds offer greater diversification, lower risk, and more predictable returns, which are key ingredients for long-term retirement success.
*Do not use this as advice about your specific situation. Please contact me to talk about your specific situation. You are never charged for meetings or advice.