Back to top

Image: Bigstock

Signs That Your Trading Will Ruin Your Retirement - January 30, 2020

Read MoreHide Full Article

Maybe you're a seasoned investor and have a good track record with stock-picking. And you may have a robust retirement portfolio - perhaps including some Zacks Top Retirement stock selections such as:

Marine Products (MPX - Free Report) , Brinker International (EAT - Free Report) and Bristol-Myers Squibb (BMY - Free Report) .

If you did something similar, would it be advisable for you to trade your own retirement nest egg?

Maybe...if you're an exceptional investor who can expertly manage risk and keep up perfectly resolute emotional control in the face of market volatility. Be that as it may, for most investors, there might be better ways to accomplish long-term retirement investing objectives.

Active stock trading requires an altogether different investing philosophy and risk - reward understanding than building wealth for retirement.

How Diversification Differs from Stock Picking

While stock picking can potentially result in outsized returns, its outsized concentrated risk can pose significant hazards 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%.

It is interesting to note that the period covered by this study includes the 1987 crash, the 2000 bear market, and the Great Recession of 2008, as well as the bull market of the 1990s.

This study suggests that one key reason for investor underperformance is trying to time volatile markets - and that irrational behavior biases tend to compound investor 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.

The Bottom Line 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 give up trading? Not necessarily. One solution is to take 10% of your investable assets and trade to generate alpha and seek 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.


See More Zacks Research for These Tickers


Normally $25 each - click below to receive one report FREE:


Bristol Myers Squibb Company (BMY) - free report >>

Brinker International, Inc. (EAT) - free report >>

Marine Products Corporation (MPX) - free report >>

Published in