Opinion: Does it make sense for retirees to actively trade stocks? What we can learn from 2020

How actively should retirees trade their portfolios?

The reason I’m asking this age-old question now is that if trading was a good idea, it should show up in 2020 performance. March would now be sitting on a year-to-date gain of more than 70%. This compares to a gain of “only” 14% for buying and holding.

It is of course unrealistic to expect that someone can exit the market at the exact high and then re-enter at the low. Nevertheless, there is plenty of room between 14% and 70% for traders to demonstrate their value to retirees and future retirees.

Of course, this year also presented many opportunities to stumble. A trader who waited for the March low to move from stocks to cash, and has since exited the market, would be sitting in a loss position greater than 30% in early December. This was a point raised earlier this week by the Wells Fargo Investment Institute.

To find out how traders actually navigated the high-risk/high-opportunity environment of 2020, I analyzed the many investment newsletter portfolios whose track records my firm has audited. I wanted to see if these real-world wallets were ahead or behind where they would have been had they not made any trades since the start of the year.

To do this, I created a hypothetical portfolio for each of these real portfolios which was an exact copy at the beginning of this year and made no changes thereafter. If this hypothetical “frozen” portfolio is now worth as much or more than its corresponding real portfolio, then we know that trading it did not add value.

This turned out to be the case in just over half of the portfolios my company monitors – 52%, to be exact. What conclusion can we draw from this? On the one hand, this percentage is lower than other years when I conducted a similar test on investment newsletters. So, to that extent, traders can take solace in the fact that in a year like 2020, the chances of success are somewhat increased.

On the other hand, this percentage is always higher than 50%. This means that the odds are always against your ability to add value to your trading.

Taxes

An additional result is relevant for those of you who trade stocks in a taxable portfolio. Beyond the 52% mentioned above, another 17% of wallets are ahead of their frozen analogues by less than 5 percentage points. It’s worth mentioning because my company’s performance calculations don’t take taxes into account.

So on an after-tax basis, it’s very likely that that extra 17% would be behind what they would have been had they stuck to what they were recommending at the start of the year. This would mean that only 31% of portfolios added after-tax value through their transactions.

It’s also worth remembering that the investment bulletins on whose portfolios I ran this test have stellar long-term records. It’s not an accident. In 2016, when my performance tracking company adopted a new business model in which newsletters paid a fixed fee to have their background audited, only the services with the best long-term returns were interested in participating.

I think it’s telling that even among advisors with the best long-term track records, the odds are stacked against them when trying to add value through short-term trades. And this is true even in a year like 2020 where there is such an opportunity for such trade to add value.

The psychological dimension of trading

These results do not necessarily mean that you should never trade. Many retirees are engaged and excited by the challenge of beating the market, and it’s not psychologically realistic or even healthy to tell them to give it up.

It is possible to both recognize this psychological reality and consider the odds against you when trying to beat an index fund. The solution was proposed decades ago by the late Harry Browne, editor of a newsletter called “Harry Browne’s Special Reports”: divide your investable assets into two portfolios, one permanent and the other speculative. The first, which would contain the bulk of your assets, would be invested in index funds and held for the long term with little or no change.

The second wallet would contain your play money in which you do your best to beat the market.

Note that by placing most of your assets in the permanent portfolio, you are not risking your financial security in retirement through your transactions. Also note that this dual wallet structure gives you a continuous and real test of your trading ability. Although there are times when your speculative portfolio will outperform your permanent portfolio, it’s a safe bet that over periods of at least several years, the latter will win out.

However, provided you have your finances well structured, there is no harm in trying. Good luck!

Mark Hulbert is a regular MarketWatch contributor. His Hulbert Ratings tracks investment newsletters that pay a fixed fee to be audited. He can be contacted at [email protected].

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