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How Trading Your Own Retirement Can Fleece Your Financial Future - November 07, 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:

First Defiance Financial (FDEF), Banner (BANR) and First American Financial (FAF).

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

Maybe ...if you're an exceptional investor who can expertly manage risk and keep up perfectly resolute emotional control in the face of market volatility. Be that as it may, for most investors, there might be better ways to accomplish long-term retirement investing objectives.

Active stock trading requires an altogether different investing philosophy and risk - reward understanding than building wealth 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.

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 Investing Success All In Your Mind?

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.

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.

The Key Takeaway for Retirement Investors

Your retirement portfolio ought to be dealt with a technique of performance over decades - not days, weeks or quarters. Most self-coordinated investors will in general miss the mark with regards to 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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First Defiance Financial Corp. (FDEF) : Free Stock Analysis Report
 
Banner Corporation (BANR) : Free Stock Analysis Report
 
First American Financial Corporation (FAF) : Free Stock Analysis Report
 
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