U.S. Markets closed

The Extreme Risks of Trading Your Own Retirement Assets - November 22, 2019

Zacks Equity Research

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:

Gaming and Leisure Properties (GLPI), Equinor (EQNR) and OceanFirst Financial (OCFC).

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 a very different investing approach and risk - reward mindset than investing for retirement.

Diversification vs. Stock Picking

While stock picking can potentially generate outsized returns, its excessive concentrated risk can present huge perils 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 talented stock pickers, the odds for long-term success are slim.

Is Investing Success All In Your Mind?

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.

An important takeaway of this study is that investors seem to underperform because they try to time volatile markets ...and irrational, emotional responses tend to these investing 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 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.

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.

But the point we're making here is that the money you have set aside for your retirement should be invested using a more conservative, long-term approach designed to produce reliable returns, so you can steadily build assets and achieve 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.


This report will help you steer clear of the most common mistakes, like trying to time the market, lack of diversification in your portfolio, and many more. Get Your FREE Guide Now
 
Gaming and Leisure Properties, Inc. (GLPI) : Free Stock Analysis Report
 
OceanFirst Financial Corp. (OCFC) : Free Stock Analysis Report
 
Statoil ASA (EQNR) : Free Stock Analysis Report
 
To read this article on Zacks.com click here.
 
Zacks Investment Research