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The Extreme Risks of Trading Your Own Retirement Assets - November 21, 2019
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You have a substantial retirement portfolio. You're an accomplished investor. You've done truly well selecting stocks. You probably already own a couple of Zacks Top Retirement stock picks like:
If this sounds like you, then here's a question: With your background and skills, should you manage your own retirement investments?
It could be a good idea - that is, if you are one of the very few investors who understands your own risk tolerance and can keep your emotions in check during chaotic market swings. However, if you're like the rest of us, there are likely more prudent ways to reach your retirement investing goals.
Active stock trading requires a very different investing approach and risk - reward mindset than investing for retirement.
How Diversification Differs from Stock Picking
While stock picking can potentially generate outsized returns, its excessive concentrated risk can present huge perils for retirement investors.
A study done by Hendrik Bessembinder of equity markets over nine decades found that just 4% of the best-performing U.S.stocks generated all the market's gains. The rest were flat - the gains of the next 38% were wiped out by the bottom 58%, which lost money.
Those numbers reinforce that, even if you are an experienced and talented stock picker, your chances of success over a long period are very slim.
Is it Possible to Invest "Rationally"?
Investors feel they can make sensible choices, however research demonstrates that the opposite is what often happens. A DALBAR study analyzed investors from 1986 to 2015 and found that the average investor significantly underperformed compared to the S&P 500. Over 30 years, the S&P 500 produced a return of 10.35%, while the average investor return was only 3.66%.
Importantly, this period included the 1987 crash and big bear markets in 2000 and 2008, but also the bull market of the 1990s.
An important takeaway of this study is that investors seem to underperform because they try to time volatile markets...and irrational, emotional responses tend to these investing mistakes.
Curiously, even experienced traders tend to underperform since they can't resist the emotional urge to make impulsive investment choices. They might be overly self-assured and miscalculate risk, get attached to a price target, or perceive a pattern that does not exist. This behavioral fallacy, over the long-term, can be disastrous with potential underperformance of a huge number of dollars disrupting your retirement.
What It All Means for Retirement Investors
Your retirement portfolio ought to be dealt with a technique of performance over decades - not days, weeks or quarters. Most self-coordinated investors will in general miss the mark with regards to long-term outcomes.
Does that mean you should quit trading? Not really. One plan is to take 10% of your investable resources and trade to create alpha and look for outsized returns.
But the bulk of your wealth - those assets earmarked for retirement - should be invested using a more measured, conservative, risk management approach to generate steady, compounded returns so you can safely reach your retirement goals.
Do You Know the Top 9 Retirement Investing Mistakes?
Whether you're planning to retire early or not, don't let investing mistakes derail your plans.
Image: Bigstock
The Extreme Risks of Trading Your Own Retirement Assets - November 21, 2019
You have a substantial retirement portfolio. You're an accomplished investor. You've done truly well selecting stocks. You probably already own a couple of Zacks Top Retirement stock picks like:
Lockheed Martin (LMT - Free Report) , CNA Financial (CNA - Free Report) and Cedar Fair, L.P. (FUN - Free Report) .
If this sounds like you, then here's a question: With your background and skills, should you manage your own retirement investments?
It could be a good idea - that is, if you are one of the very few investors who understands your own risk tolerance and can keep your emotions in check during chaotic market swings. However, if you're like the rest of us, there are likely more prudent ways to reach your retirement investing goals.
Active stock trading requires a very different investing approach and risk - reward mindset than investing for retirement.
How Diversification Differs from Stock Picking
While stock picking can potentially generate outsized returns, its excessive concentrated risk can present huge perils for retirement investors.
A study done by Hendrik Bessembinder of equity markets over nine decades found that just 4% of the best-performing U.S.stocks generated all the market's gains. The rest were flat - the gains of the next 38% were wiped out by the bottom 58%, which lost money.
Those numbers reinforce that, even if you are an experienced and talented stock picker, your chances of success over a long period are very slim.
Is it Possible to Invest "Rationally"?
Investors feel they can make sensible choices, however research demonstrates that the opposite is what often happens. A DALBAR study analyzed investors from 1986 to 2015 and found that the average investor significantly underperformed compared to the S&P 500. Over 30 years, the S&P 500 produced a return of 10.35%, while the average investor return was only 3.66%.
Importantly, this period included the 1987 crash and big bear markets in 2000 and 2008, but also the bull market of the 1990s.
An important takeaway of this study is that investors seem to underperform because they try to time volatile markets...and irrational, emotional responses tend to these investing mistakes.
Curiously, even experienced traders tend to underperform since they can't resist the emotional urge to make impulsive investment choices. They might be overly self-assured and miscalculate risk, get attached to a price target, or perceive a pattern that does not exist. This behavioral fallacy, over the long-term, can be disastrous with potential underperformance of a huge number of dollars disrupting your retirement.
What It All Means for Retirement Investors
Your retirement portfolio ought to be dealt with a technique of performance over decades - not days, weeks or quarters. Most self-coordinated investors will in general miss the mark with regards to long-term outcomes.
Does that mean you should quit trading? Not really. One plan is to take 10% of your investable resources and trade to create alpha and look for outsized returns.
But the bulk of your wealth - those assets earmarked for retirement - should be invested using a more measured, conservative, risk management approach to generate steady, compounded returns so you can safely reach your retirement goals.
Do You Know the Top 9 Retirement Investing Mistakes?
Whether you're planning to retire early or not, don't let investing mistakes derail your plans.
If you have $500,000 or more to invest and want to learn more, click the link to download our free report, 9 Retirement Mistakes that will Ruin Your Retirement.