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How Trading Your Own Retirement Can Fleece Your Financial Future - January 23, 2020

Zacks Equity Research

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:

AbbVie (ABBV), Sandy Spring Bancorp (SASR) and Heritage Commerce (HTBK).

If that sounds like you, should you actively trade your own retirement assets?

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.

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.

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.

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.

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.

Do You Know the Top 9 Retirement Investing Mistakes?

Whether you're planning to retire early or not, don't let investing mistakes derail your plans.

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.


This report will help you steer clear of the most common mistakes, like trying to time the market, lack of diversification in your portfolio, and many more. Get Your FREE Guide Now
 
AbbVie Inc. (ABBV) : Free Stock Analysis Report
 
Sandy Spring Bancorp, Inc. (SASR) : Free Stock Analysis Report
 
Heritage Commerce Corp (HTBK) : Free Stock Analysis Report
 
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