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Signs That Your Trading Will Ruin Your Retirement - October 21, 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:

Independent Bank (IBCP), AT&T (T) and Grupo Aeroportuario del Sureste (ASR).

If that sounds like you, should you actively trade your own retirement assets?

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.

Active stock trading requires a very different investing approach and risk - reward mindset than investing for retirement.

Managing Retirement Investments: Stock Picking vs. Diversification

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 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 expert stock pickers, the chances for long-term achievement are thin.

Is Successful Investing a Mind Game?

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 worth noting that this period included the 1987 crash and enormous bear markets in 2000 and 2008, and the positively trending market of the 1990s as well.

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.

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.

The Bottom Line 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 quit trading? Not really. One plan is to take 10% of your investable resources and trade to create alpha and look for 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.

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Independent Bank Corporation (IBCP) : Free Stock Analysis Report
 
Grupo Aeroportuario del Sureste, S.A. de C.V. (ASR) : Free Stock Analysis Report
 
AT&T Inc. (T) : Free Stock Analysis Report
 
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