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:
Bristol Myers Squibb (BMY), Amgen (AMGN) and Global Medical REIT (GMRE).
If you did something similar, would it be advisable for you to trade your own retirement nest egg?
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.
That’s because the risk – reward scenario and investing approach is completely different for long-term wealth building and active stock trading.
Managing Retirement Investments: Stock Picking vs. Diversification
Picking individual stocks has the potential for huge returns – but also carries a lot of risk, which is particularly hazardous when investing for retirement.
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.
For even the most expert stock pickers, the chances for long-term achievement are thin.
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 interesting to note that the period covered by this study includes the 1987 crash, the 2000 bear market, and the Great Recession of 2008, as well as the bull market of the 1990s.
This study suggests that one key reason for investor underperformance is trying to time volatile markets – and that irrational behavior biases tend to compound investor mistakes.
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
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.
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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If you have $500,000 or more to invest and want to learn more, click the link to download our free report, 9 Retirement Mistakes that will Ruin Your Retirement.
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