The Extreme Risks of Trading Your Own Retirement Assets - November 08, 2019
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:
Darden Restaurants (DRI), CenterPoint Energy (CNP) and Southwest Gas (SWX).
If this sounds like you, then here's a question: With your background and skills, should you manage your own retirement investments?
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.
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%.
For even the most expert stock pickers, the chances for long-term achievement are thin.
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.
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.
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.
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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Darden Restaurants, Inc. (DRI): Free Stock Analysis Report
CenterPoint Energy, Inc. (CNP): Free Stock Analysis Report
Southwest Gas Corporation (SWX): Free Stock Analysis Report
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