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The Extreme Risks of Trading Your Own Retirement Assets - December 19, 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 you did something similar, would it be advisable for you to trade your own retirement nest egg?
Perhaps...if you're the "one in a million" investor who can expertly manage risk and maintain unflinching emotional control in volatile markets. But for most, there may be better strategies to achieve long-term retirement investing goals.
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
While stock picking can potentially generate outsized returns, its excessive concentrated risk can present huge perils 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%.
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 Investing Success All In Your Mind?
Most people think they can make rational investment decisions, but research indicates the opposite is often true. Investors followed in a DALBAR study performed significantly worse than the S&P 500: For the 30 years between 1986 to 2015, the average investor earned just 3.66%, whereas the S&P 500 produced a 10.35% return.
Importantly, this period included the 1987 crash and big bear markets in 2000 and 2008, but also 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.
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 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.
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The Extreme Risks of Trading Your Own Retirement Assets - December 19, 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:
Armada Hoffler Properties (AHH - Free Report) , Broadcom Inc. (AVGO - Free Report) and Banner (BANR - Free Report) .
If you did something similar, would it be advisable for you to trade your own retirement nest egg?
Perhaps...if you're the "one in a million" investor who can expertly manage risk and maintain unflinching emotional control in volatile markets. But for most, there may be better strategies to achieve long-term retirement investing goals.
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
While stock picking can potentially generate outsized returns, its excessive concentrated risk can present huge perils 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%.
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 Investing Success All In Your Mind?
Most people think they can make rational investment decisions, but research indicates the opposite is often true. Investors followed in a DALBAR study performed significantly worse than the S&P 500: For the 30 years between 1986 to 2015, the average investor earned just 3.66%, whereas the S&P 500 produced a 10.35% return.
Importantly, this period included the 1987 crash and big bear markets in 2000 and 2008, but also 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.
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 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.