If you are an accomplished investor with an in-depth knowledge of stock selection, then you probably already have a couple of Zacks Top Retirement stocks in your portfolio. These include stocks like Amgen (AMGN), AbbVie (ABBV), and Bristol Myers Squibb (BMY).
Suppose you’re among the rare class of investors who can expertly manage risks and maintain strong emotional control during market volatility. In that case, your strategy might be to trade your retirement assets actively.
For many other investors, this may not be feasible. Since they lack basic knowledge of trading, they resort to a different strategy to achieve long-term retirement savings success.
Managing Retirement Investments: Between Stock Picking vs. Diversification
While stock picking can generate better returns, the attached risk level can present a huge peril for retirement investors. Hendrik Bessembinder revealed that only about 4% of equities produced all the stock market gains for the past 90 years. All other stocks “broke even” with a 38% increase canceled out by 58% loss. The odds for long-term success are quite slim, even for the most talented stock pickers.
Is it Possible to Attain Success Investing “Rationally”?
Most investors believe they can make rational decisions, but research has shown that that may not always be the case. A recent study by DALBAR that tracked investors from 1986 to 2015 found that the average investor performed substantially lower than the S&P 500. The S&P 500 returned 10.35% compared to the average of 3.66% for investors.
It’s worth knowing that the 30-year period covered the 1987 crash, the financial market crisis of 2000 and 2008, and the positive market trend of the 1990s.
The study ties investors’ underperformance to the attempt to time-volatile markets. This irrational behavior bias tends to compound their mistakes.
The truth is that even experienced traders tend to underperform since they can’t resist the impulsive urges to make highly risky investments. They’re often overly self-assured and miscalculate risk, become enticed with a price target, or perceive non-existent patterns.
The clinging to fallacies can lead to potential underperformance of most investments and disrupt your retirement investment in the long run.
Key Take-Aways for Investors
The best strategy to approach your retirement portfolio should be long term. Your technique of performance should be over decades, not days, weeks, months, or quarters. Most self-coordinated investors may not reach the general mark in terms of long-term outcomes.
This doesn’t mean you shouldn’t trade at all – far from it. If you have the technical capacity and love trading, then, by all means, trade. It would help if you considered putting 10% of your investable assets in short-term investments to seek more significant returns.
However, the bulk of your retirement funds should be invested through a more measured, conservative, and low-risk approach to generate compounded returns that you can rely on for your retirement goals.