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:
AbbVie (ABBV), Amgen (AMGN) and Bristol Myers Squibb (BMY).
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.
How Diversification Differs from Stock Picking
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 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.
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 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.
However, the major part of your wealth – those assets reserved for retirement – ought to be invested utilizing a more careful, conservative, risk management strategy to produce steady, compounded returns so you can securely achieve your retirement objectives.
Do You Know the Top 9 Retirement Investing Mistakes?
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