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The Extreme Risks of Trading Your Own Retirement Assets - December 20, 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:
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.
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 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 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 suggests that one key reason for investor underperformance is trying to time volatile markets - and that irrational behavior biases tend to compound investor mistakes.
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.
We're not saying you should not trade at all - far from it. If you enjoy trading, perhaps you should put 10% of your investable assets to work in short-term investments to seek alpha and 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 20, 2019
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:
First Defiance Financial , FNF Group (FNF - Free Report) and First American Financial (FAF - 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.
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 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 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 suggests that one key reason for investor underperformance is trying to time volatile markets - and that irrational behavior biases tend to compound investor mistakes.
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.
We're not saying you should not trade at all - far from it. If you enjoy trading, perhaps you should put 10% of your investable assets to work in short-term investments to seek alpha and 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.