Value Nomad

April 2, 2020

The Risks of Trading Your Retirement

Trading your retirement portfolio is a risky bet. Even for seasoned stock pickers, you still must deal with the emotional roller-coaster of trading market volatility. Knowing that you might be pissing off your nest egg only adds to the pressure.

Given the risk-reward scenario in trading vs. passive investing your nest egg, perhaps the latter offers a better road map to your eventual retirement.

risks of trading your retirement

Diversification vs. Stock Picking

Diversified investment differs significantly from stock picking. The latter is almost akin to gambling, especially for the regular investor.

While stock picking can sometimes deliver outsize returns, its outsized concentrated risks can pose detrimental hazards for retirement investors. A fall in the price of a stock can slash your nest egg and take you back a great deal.

One study on equity markets by Hendrik Bessembinder found that only 4% of the best-performing U.S. stocks generated all the market gains over nine decades. Even for the most seasoned stock-pickers, the chances of selecting the right 4% of shares for long term growth are pretty thin.

Successful Investing

Most investors think they can make rational decisions. However, research indicates that it’s a fallacy. One DALBAR study found that the average investor grossly under-performed the S&P 500 in a period between 1986 – 2015. While the S&P returned an average of 10.35%, the average investor managed a paltry of 3.66%.

It’s worth noting that the study period included the crash of 1987, the 2000 bear market, Great Recession 2008, and the 1990’s bull market.

For retirement investors, the message is clear: Steer clear of trying to time the markets. Your irrational, emotional responses only worsen your investment decisions. Instead, invest in a broad market fund that tracks the general performance of the overall market. Study after study has demonstrated the strategy as being the best performing for the ordinary investor over the long run.

Retirement Investing – Buyer Beware

Your retirement savings ought to last you the rest of your life. As such, you should not gamble with your nest egg. You must also consider performance over the years instead of weeks or months.

That doesn’t mean you can’t trade. If anything, if you enjoy stock picking, set aside a portion of your portfolio for the purpose. The rest of your portfolio, however, should be in a diversified, well -managed and slightly conservative portfolio.

Successful retirement depends on how best you manage your nest egg. Avoiding some common investing mistakes will give you a better head-start than you’d get gambling your hard-earned cash on risky stock bets.

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