An experienced investor may be able to successfully manage his or her own retirement account, but like most things, success is not 100% guaranteed. In fact, taking control of your retirement account could actually put your nest egg in jeopardy, according to studies.
“Most people think they can make rational investment decisions, but research indicates the opposite is often true. Investors followed in a DALBAR study performed significantly worse than the S&P 500: For the 30 years between 1986 to 2015, the average investor earned just 3.66%, whereas the S&P 500 produced a 10.35% return,” a Zacks Equity Research article noted. “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.”
Timing can be everything, but in the capital markets, you can almost throw timing out the window completely. The study showed further that timing markets can work against the savviest of traders.
“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,” the article added.
Factor Investing for Your Retirement
Retirement can be a time when you kick up your feet and live off the fruits of your labor while avoiding risky money maneuvers that could put your nest egg in jeopardy. So when it comes to factor investing, how did retirees respond—quite favorably as a matter of fact.
Global investment company Northern Trust Asset Management asked about 1,200 workers and retirees what their thoughts were when it came to factor investing.
“When asked whether they found the idea of factor-based strategies appealing, 60% of both retirees and workers said they either found them ‘very’ or ‘somewhat’ appealing,” wrote Susan Czochara in a 401K Specialist article. “We think this is based on the idea of efficient risk-taking when investing, discussed above. Factor-based strategies are based on understanding how different types of investments (big companies vs. small or high quality vs. low quality) have performed in different market conditions.”
If investors want to get multi-factor exposure to exchange-traded funds (ETF) as part of their retirement portfolio strategy, one fund to look at is the Principal U.S. Mega-Cap Multi-Factor Index ETF (USMC). The fund seeks to provide investment results that closely correspond, before expenses, to the performance of the Nasdaq US Mega Cap Select Leaders Index.
Under normal circumstances, the fund invests at least 80% of its net assets, plus any borrowings for investment purposes, in equity securities that compose the index at the time of purchase. The index uses a quantitative model designed to identify equity securities of companies in the Nasdaq US 500 Large Cap Index (the “parent index”) that have the largest market capitalizations, with higher weights given to less volatile securities.
For more market trends, visit ETF Trends.