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The Extreme Risks of Trading Your Own Retirement Assets - November 06, 2019

Zacks Equity Research

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:

Gaming and Leisure Properties (GLPI), Arbor Realty Trust (ABR) and Equinor (EQNR).

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 over nine decades found that just 4% of the best-performing U.S.stocks generated all the market's gains. The rest were flat - the gains of the next 38% were wiped out by the bottom 58%, which lost money.

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

Is Successful Investing a Mind Game?

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.

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 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.

The Key Takeaway for Retirement Investors

When it comes to managing your assets for retirement, you must look at performance over the course of years and decades - not weeks or months. Because most traders generally tend to focus on the short term, they may not have the right mindset to achieve successful 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 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.

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Gaming and Leisure Properties, Inc. (GLPI) : Free Stock Analysis Report
 
Arbor Realty Trust (ABR) : Free Stock Analysis Report
 
Statoil ASA (EQNR) : Free Stock Analysis Report
 
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