I am 20 years old and I have extra money in my Roth IRA. And I was wondering if you could suggest some stocks for me to look into?
That was the question posed to Jeffrey Levine, director of advanced planning at Buckingham Wealth Partners, in this episode of Ask the Hammer on Retirement Daily.
Before answering that question, Levine said it's worth offering a hearty congratulations on not only having a Roth IRA but having extra money in it as well.
That said, there are a few ways to think about this.
One, if you're so inclined to invest in an individual stock then do your research. "Understand what it is, why you own it, why you think it's going to do well," said Levine. "But if you want to throw some money at something that you think could have a crazy run over the next couple of decades, go for it."
Know too that owning an individual stock means that you're assuming a risk that is specific to that security. This is known variously known as specific, idiosyncratic, non-systematic, or unsystematic risk. The good news, according to CFA Institute, is that can reduce specific risk by holding a number of different securities in their portfolios. Holding a number of different securities that are not correlated diversifies away specific risk.
If you do plan on buying stocks with the extra money in your Roth IRA, Levine suggests considering one of two approaches. Set boundaries. Invest only the money you can afford to lose or set a limit on how much you are willing to lose.
Another tactic to consider when buying individual stocks: Consider using dollar-cost averaging.
Another option would be to invest in an ETF that has growth has an investment objective, or a broad-based well-diversified low-cost mutual fund.
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