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Signs That Your Trading Will Ruin Your Retirement - November 05, 2019

Zacks Equity Research

Maybe you're a seasoned investor and have a good track record with stock-picking. And you may have a robust retirement portfolio - perhaps including some Zacks Top Retirement stock selections such as:

OceanFirst Financial (OCFC), FNF Group (FNF) and CNA Financial (CNA).

If you did something similar, would it be advisable for you to trade your own retirement nest egg?

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 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 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 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 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.

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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OceanFirst Financial Corp. (OCFC) : Free Stock Analysis Report
 
CNA Financial Corporation (CNA) : Free Stock Analysis Report
 
Fidelity National Financial, Inc. (FNF) : Free Stock Analysis Report
 
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