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The Extreme Risks of Trading Your Own Retirement Assets - December 16, 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:
EQT Midstream Partners, LP , PennyMac Mortgage (PMT - Free Report) and Brinker International (EAT - Free Report) .
If that sounds like you, should you actively trade your own retirement assets?
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.
That's because the risk - reward scenario and investing approach is completely different for long-term wealth building and active stock trading.
Diversification vs. Stock Picking
Picking individual stocks has the potential for huge returns - but also carries a lot of risk, which is particularly hazardous when investing for retirement.
A study done by Hendrik Bessembinder of equity markets spanning nine decades revealed that only 4% of the best-performing U.S.stocks produced all the market's increases. The rest were flat - the gains of the following 38% were offset by the losses of the bottom 58%.
For even the most expert stock pickers, the chances for long-term achievement are thin.
Is Successful Investing a Mind Game?
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 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 indicates that one key explanation behind investor underperformance is attempting to time volatile markets - and that irrational emotional biases are likely to compound investor botches.
Interestingly, even savvy traders tend to underperform because they can't help but allow emotions to drive investment decisions. They may be overconfident and misjudge risk, latch onto a price target, or perceive a pattern that isn't there. This "behavior gap", over the long-term, can be catastrophic with potential underperformance of hundreds of thousands of dollars sabotaging 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 quit trading? Not really. One plan is to take 10% of your investable resources and trade to create alpha and look for outsized returns.
However, the major part of your wealth - those assets reserved for retirement - ought to be invested utilizing a more careful, conservative, risk management strategy to produce steady, compounded returns so you can securely achieve your retirement objectives.
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 - December 16, 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:
EQT Midstream Partners, LP , PennyMac Mortgage (PMT - Free Report) and Brinker International (EAT - Free Report) .
If that sounds like you, should you actively trade your own retirement assets?
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.
That's because the risk - reward scenario and investing approach is completely different for long-term wealth building and active stock trading.
Diversification vs. Stock Picking
Picking individual stocks has the potential for huge returns - but also carries a lot of risk, which is particularly hazardous when investing for retirement.
A study done by Hendrik Bessembinder of equity markets spanning nine decades revealed that only 4% of the best-performing U.S.stocks produced all the market's increases. The rest were flat - the gains of the following 38% were offset by the losses of the bottom 58%.
For even the most expert stock pickers, the chances for long-term achievement are thin.
Is Successful Investing a Mind Game?
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 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 indicates that one key explanation behind investor underperformance is attempting to time volatile markets - and that irrational emotional biases are likely to compound investor botches.
Interestingly, even savvy traders tend to underperform because they can't help but allow emotions to drive investment decisions. They may be overconfident and misjudge risk, latch onto a price target, or perceive a pattern that isn't there. This "behavior gap", over the long-term, can be catastrophic with potential underperformance of hundreds of thousands of dollars sabotaging 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 quit trading? Not really. One plan is to take 10% of your investable resources and trade to create alpha and look for outsized returns.
However, the major part of your wealth - those assets reserved for retirement - ought to be invested utilizing a more careful, conservative, risk management strategy to produce steady, compounded returns so you can securely achieve your retirement objectives.
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.