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:
Lockheed Martin (LMT), Amgen (AMGN) and AbbVie (ABBV).
If you did something similar, would it be advisable for you to trade your own retirement nest egg?
It could be a good idea - that is, if you are one of the very few investors who understands your own risk tolerance and can keep your emotions in check during chaotic market swings. However, if you're like the rest of us, there are likely more prudent ways to reach your 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.
Diversification vs. Stock Picking
While stock picking can potentially generate outsized returns, its excessive concentrated risk can present huge perils 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 Investing Success All In Your Mind?
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%.
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 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
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.
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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Lockheed Martin Corporation (LMT) : Free Stock Analysis Report
Amgen Inc (AMGN) : Free Stock Analysis Report
AbbVie Inc (ABBV) : Free Stock Analysis Report
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