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Wednesday, October 21, 2020

I’m a former banker, and the best retirement advice I’ve ever heard is also the most boring

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When it comes to investing, everyone wants to feel like the genius who picked a stock and made their money back many times over. While we might hit it right and buy an Amazon or a Netflix from time to time, odds are we are not investing enough money to retire on.

On top of that, picking single stocks might not be the right strategy for your retirement dollars. Single stocks can be very risky and may not make sense for all investors.

The best retirement investment advice I’ve ever come across can help you avoid risk and stay on track for your long-term goals. 

Movies like “The Wolf of Wall Street,” “Boiler Room,” and the classic “Wall Street with Bud Fox and Gordon Gecko” make the world of investing look very cool. Between Hollywood portrayals and an occasional news story of someone getting extremely wealthy in the stock market, it’s no wonder many people want to emulate the successes they see on screen.

But the best retirement investment advice I’ve ever come across in my years in finance says to do just the opposite: When it comes to retirement investing, you should generally stick with boring investments.

Exciting investments might come with the possibility of 10x returns. But they could also come with the possibility of losing a big chunk of your money. To get a better understanding, let’s look at two possible investments to see which makes more sense for your retirement account.

One of the most exciting companies in the United States today is Tesla. Whether you love or hate eccentric founder Elon Musk, there’s no question that Tesla is working to remake the markets for cars, batteries, solar power, and energy distribution.

Tesla stock has only existed since 2010. That’s not a very long track record for success. While the stock has skyrocketed over the last year, there’s definitely a lot of instability in its price. The company sometimes moves quickly based on tweets made by its founder and CEO, and there are regular questions about whether or not the company can run a long-term profitable operation.

Just in the last 12 months, the stock has gone from $200 per share to over $900 then back down to about $360 before climbing back over $800. With stocks like Tesla, timing means a lot, and there’s just as good of a chance you’ll lose money as make it.

Looking at a chart comparing Tesla to the low-cost Vanguard S&P 500 index fund shows the varying stability you get with each investment.

tesla stock

TSLA vs. VOO over the last five years.

Google Finance


With Tesla, your success rides on the success of one company. If you had bought when the stock first ran up to over $900, you would still be down now. The stock went up and down regularly over the last five years based on both company and economic news.

At the same time, VOO steadily chugged along. Made up of 500 of the biggest US stocks, the S&P 500 index had a great run over the last five years until the start of the coronavirus in early 2020.

If you had bought Tesla early enough, you could have made a return of thousands of percentage points. However, there was also a risk that you bought at the wrong time and lost a lot. That volatility is much lower when it comes to broad stock indices like the S&P 500.

While a well-timed purchase of Tesla could have made you more than the S&P 500, it’s important to consider more than just one stock when deciding how to invest, especially for retirement. 

Possibly the best way to look at how people do picking single stocks compared to the market comes from looking at the performance of actively managed investment funds.

According to S&P Global, 70% of domestic equity funds lagged behind the S&P Composite 1500 index in 2019. For 10 years in a row, the majority of funds underperformed the S&P 500. For 2019, 71% missed that mark. Of all large-cap funds, 89% underperformed the S&P 500 over the last decade. Most underperform against their respective category indices as well.

If people who spend 40, 50, 60, or more hours every week picking stocks on Wall Street can’t beat the market, most of us can’t do it either. If nearly 90% of full-time professional investors can’t beat a market index, the evidence clearly says our investments shouldn’t be made up of exciting single stocks.

The best place for most people to invest for retirement is boring index funds. While they might not be exciting, they generally perform best in the long run.

Over the last 15 years, according to S&P Global data, about 80% to 90% actively managed funds have underperformed compared to the S&P’s benchmark market index.

With odds like that, it’s hard to justify including single stocks, risky options, or unfounded assets like cryptocurrency in your retirement portfolio. Avoiding excess risk and steadily adding to a portfolio of boring, low-cost index funds is the best route to retirement success.

Eric Rosenberg is a finance, travel, and technology writer in Ventura, California. He is a former bank manager and corporate finance and accounting professional who left his day job in 2016 to take his online side hustle full-time. He has in-depth experience writing about banking, credit cards, investing, and other financial topics, and is an avid travel hacker.

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