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The Extreme Risks of Trading Your Own Retirement Assets - November 04, 2019

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You have a significant retirement portfolio. You're an experienced investor. You've done pretty well at picking stocks. You probably even own a few of Zacks Top Retirement stock picks like:

Phillips 66 Partners LP , Bristol-Myers Squibb (BMY - Free Report) and Lamar Advertising (LAMR - 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 an altogether different investing philosophy and risk - reward understanding than building wealth for retirement.

Managing Retirement Investments: Stock Picking vs. Diversification

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

In fact, a study done by Hendrik Bessembinder revealed that only 4% of equities produced all of the stock market's gains over the last 90 years. All other stocks "broke even" with the increases of 38% canceled out by the losses of the bottom 58%.

For even the most talented stock pickers, the odds for long-term success are slim.

Is Investing Success All In Your Mind?

Investors think they can make rational decisions, but research shows that the opposite is often true. A recent DALBAR study tracked investors from 1986 to 2015 and found that the average investor substantially underperformed compared to the S&P 500. Over 30 years, the S&P 500 returned 10.35%, but the average investor return was just 3.66%.

It is worth noting that this period included the 1987 crash and enormous bear markets in 2000 and 2008, and the positively trending market of the 1990s as well.

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.

What It All Means for Retirement Investors

Your retirement portfolio should be managed with a strategy of performance over decades - not days, weeks or quarters. Most self-directed investors tend to fall short when it comes to long-term results.

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.

Did you know that one in six people retire a multi-millionaire?

Read our just-released report: 7 Things You Can Do Now to Retire a Multi-Millionaire.


See More Zacks Research for These Tickers


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

Lamar Advertising Company (LAMR) - free report >>

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