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Signs That Your Trading Will Ruin Your Retirement - October 08, 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:

American Eagle Outfitters (AEO), Bristol-Myers Squibb (BMY) and CNB Financial (CCNE).

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

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 an altogether different investing philosophy and risk - reward understanding than building wealth 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.

In fact, a study done by Hendrik Bessembinder revealed that only 4% of equities produced all of the stock market's gains over the last 90 years. All other stocks "broke even" with the increases of 38% canceled out by the losses of the bottom 58%.

Those numbers reinforce that, even if you are an experienced and talented stock picker, your chances of success over a long period are very 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 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.

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.

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 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.

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.

Did you know that one in six people retire a multi-millionaire?

Read our just-released report: 7 Things You Can Do Now to Retire a Multi-Millionaire.


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American Eagle Outfitters, Inc. (AEO) : Free Stock Analysis Report
 
Bristol-Myers Squibb Company (BMY) : Free Stock Analysis Report
 
CNB Financial Corporation (CCNE) : Free Stock Analysis Report
 
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