Retirees should resist the urge to speculate on stocks
http://www.marketwatch.com/story/retirees-should-resist-the-urge-to-speculate-on-stocks-2015-11-03
I was recently at a compliance meeting, and during a break for coffee, I struck up a conversation with an elderly man. We got to talking and he told me that he has started actively trading stocks in order to help supplement his retirement income. He said he used a free demo that a company offered, and he did really well, and he decided that it should be pretty easy to generate an extra $1,500-$2,000 a month from his portfolio. When I pressed him for a bit more information, he revealed that he already pulls out about $1,500 a month and he has a portfolio worth about $300,000. That means he needs a (gasp) 14% return.
I urged him to rethink his new hobby. I stressed to him that if he starts losing money, he will be up the creek as he is going to start drawing down principal very quickly and after a few years, the $1,500 a month he needs will be in jeopardy. He didn’t budge, so then I tried explaining all that is involved in actively trading his account, including the sleepless nights and the need to watch the screen during trading hours. I added how his wife won’t be too happy while they’re on vacation in Paris, instead of seeing the Eiffel tower, he will be sitting in his hotel room with his finger on the trading trigger. Not a great vacation. He thanked me for caring and told me he will do fine.
Great Expectations
Many speculators who are new to investing, have been led to believe that it’s very easy making loads and loads of money trading stocks. Many start off using a free practice account and trade for “fun” and have some success, and believe that success will turn into actual dollars.
This short-term instant success can suck in inexperienced traders. They start thinking that every stock pick they make will be a winner, and that soon they will be rich. All this while having some fun and doing very little work.
A tale of two cities
The famous opening to Charles Dickens’ “A Tale of Two Cities” — “It was the best of times it was the worst of times” — is very apropos for these inexperienced speculators. When it comes time to begin trading with actual money, everything changes. Why should things be different? Because when the game begins, emotions start playing a very large part in every decision made.
Professionals term this as “Trading Psychology.” While it seems easy to make money when you are only trading conceptually, when your actual hard-earned dollars are at risk, your focus and trading discipline evaporate. While trading “Monopoly” money, you can stick to your strategy, and even when things go against you, you can be patient and weather the storm. Unfortunately, when a trader’s actions come to affect the gain or loss of his or her own personal assets, that trader is less likely to stick to the original strategy.
Emotions
There are many emotions at play when your actual money is at risk.
Greed: You may have made a successful trade, but you have the need to make more and more money, and instead of selling, you hold, the stock goes down, and you end up losing money.
Fear: Even presented with a good opportunity, due to a fear of losing money either the individual will never even place the order or will sell far too early.
Decision Paralyses: Traders sometimes get so caught up in analyzing potential investments to the nth degree, they can never ever decide if they should pull the trigger and make the trade.
Be smart
If you are looking for a hobby in retirement and trading stocks is intriguing, only use the money that you can afford to lose. Don’t play with money that is critical to fund your retirement. Don’t fool yourself into thinking that you have the secret sauce and will outperform even the most successful investors, because you won’t. You spent your whole life saving and investing correctly in order to fund a fulfilling and enjoyable retirement; don’t blow it trying to do the near impossible.
The information contained in this article reflects the opinion of the author and not necessarily the opinion of Portfolio Resources Group, Inc. or its affiliates.
