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How Trading Your Own Retirement Can Fleece Your Financial Future - October 25, 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:

Medifast (MED), Brinker International (EAT) and Grupo Aeroportuario del Centro Norte (OMAB).

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.

That's because the risk - reward scenario and investing approach is completely different for long-term wealth building and active stock trading.

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%.

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 it Possible to Invest "Rationally"?

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.

Importantly, this period included the 1987 crash and big bear markets in 2000 and 2008, but also 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.

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 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 bulk of your wealth - those assets earmarked for retirement - should be invested using a more measured, conservative, risk management approach to generate steady, compounded returns so you can safely reach 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.

Click here for a free report>> MEDIFAST INC (MED) : Free Stock Analysis Report Grupo Aeroportuario del Centro Norte S.A.B. de C.V. (OMAB) : Free Stock Analysis Report Brinker International, Inc. (EAT) : Free Stock Analysis Report To read this article on Zacks.com click here. Zacks Investment Research