The Extreme Risks of Trading Your Own Retirement Assets - November 07, 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:

Horizon Bancorp (HBNC), CVS Health (CVS) and Broadcom Inc. (AVGO).

If this sounds like you, then here's a question: With your background and skills, should you manage your own retirement investments?

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 a very different investing approach and risk - reward mindset than investing 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%.

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"?

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.

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.

What It All Means 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 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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Horizon Bancorp (IN) (HBNC) : Free Stock Analysis Report
 
Broadcom Inc. (AVGO) : Free Stock Analysis Report
 
CVS Health Corporation (CVS) : Free Stock Analysis Report
 
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