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:
EQT Midstream Partners, LP (EQM), CVS Health (CVS) and Brinker International (EAT).
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.
That's because the risk - reward scenario and investing approach is completely different for long-term wealth building and active stock trading.
Diversification vs. 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%.
For even the most expert stock pickers, the chances for long-term achievement are thin.
Is Successful Investing a Mind Game?
Investors think they can make rational decisions, but research shows that the opposite is often true. A recent DALBAR study tracked investors from 1986 to 2015 and found that the average investor substantially underperformed compared to the S&P 500. Over 30 years, the S&P 500 returned 10.35%, but the average investor return was just 3.66%.
Importantly, this period included the 1987 crash and big bear markets in 2000 and 2008, but also 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.
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.
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.
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.
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EQT Midstream Partners, LP (EQM) : Free Stock Analysis Report
CVS Health Corporation (CVS) : Free Stock Analysis Report
Brinker International, Inc. (EAT) : Free Stock Analysis Report
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