Should I Be Trading in My Retirement Accounts?

Reviewed by David KindnessReviewed by David Kindness

For investors who insist on actively managing their savings, a tax-advantaged retirement account can seem like an ideal place to do it.

As Scot Landborg, co-founder, partner, and senior wealth advisor at Sterling Wealth Partners explains, “From a tax perspective, if you’re going to actively manage and move in and out of different positions, your retirement account, Roth account, or IRA are the best places to do it because you won’t have any tax consequences from buying and selling positions.”

However, while trading in a retirement account can be beneficial from a tax perspective, it could also be detrimental if not done carefully.

Here’s what you should keep an eye on.

Key Takeaways

• You can trade in your retirement account, but there are a few things you should watch out for.
• Trading too much can negatively impact performance.
• Focusing on the short term might hurt you in the long term.
• Rebalancing too frequently can eat away at your returns.
• Don’t discount the benefits of automating certain decisions.

Excessive Trading Can Hurt Performance

Investopedia conducted a survey in July 2018 of a representative sample of 122 readers in the U.S. to find out whether (and how) they use their retirement accounts to trade stocks. More than 40% of respondents indicated that they trade in their tax-advantaged accounts.

Out of those respondents who do trade in their retirement accounts, 10% said they trade multiple times per week—which isn’t necessarily a good idea, according to Jamie Hopkins, director of retirement research at the Carson Group.

“Checking your balances, statements, and investment performance are good behaviors, but excessively trading your investments is not,” Hopkins said.

More than 60% of Investopedia survey respondents who do trade in their accounts say they do so in reaction to “changes in the stock market.” However, this type of trading behavior can be risky, according to Hopkins.

“The biggest risk to retirement security is often yourself,” Hopkins said. “When markets decline people tend to panic and sell, fearing a loss. However, by selling, you lock in that loss. Instead, you need to have a plan and emergency funds to ride out the downturns in the market.”

Watch the Long, Not Short, Term

Patrick Healey, CFP®, founder, and president of Caliber Financial Partners, noted that many investors suffer from what he refers to as “short-termism.”

Investors “want that instant gratification of placing a trade and making a bit of money on it, but tend to make irrational and emotional decisions” that lead to long-term losses, Healey said.

Healey’s claims are supported by research. According to the 2024 DALBAR Quantitative Analysis of Investor Behavior study, the average equity fund investor underperformed the market.

“The Average Equity Investor earned 5.5% less than the S&P 500 in 2023, the 3rd largest investor gap in the last 10 years,” according to the report.

That difference is due largely to investor behavior.

“Frequent trading of stocks based on instincts or short-term market trends often results in bad outcomes for the average investor,” Hopkins said.

Find a Balance With Rebalancing

Half of Investopedia survey respondents who trade in their retirement accounts do so in order to rebalance their accounts.

However, rebalancing too frequently may lead to higher costs, and reacting to a falling market may imperil your future retirement goals.

“It’s okay to rebalance it occasionally, but if you try to use it to time the market, you may be digging yourself a financial hole that you will never be able to climb out of,” said Investopedia Editor-in-Chief Caleb Silver.

Note

Robo-advisors like Betterment offer to take human error out of rebalancing by automating the process while nudging you into better-saving behaviors.

Automate Your Investment Decisions

“Now is the time to put into writing what you’ll do if the market goes down 10% or 20%,” Landborg said.

He recommends putting together an investment policy statement, similar to the one that many financial advisors assemble for their clients. The process doesn’t have to be as intricate or as formal as it sounds.

Younger investors can have something as simple as a paragraph that reminds them to “stay the course and not make changes” in the event of a downturn, Landborg said. Older savers who are approaching retirement should “lay out [what they’ll do differently] if the market drops,” as well as what the market will have to do in order for them to increase their equities exposure, Landborg added.

Investors who are hesitant to put in the time and effort required to make such a plan should look to professional or automated investing strategies. While financial advisors can help savers put together a holistic financial plan, automated options, such as target-date strategies or robo-advisors, offer a solution for investors who are just looking to put their investments on autopilot.

“Automate your plan as much as possible, including your investments,” Hopkins said. “While it is healthy to look at your account balances and investment performance, realize that you are unlikely to beat the market and your frequent trading, which for a year or two might look good, will eventually come back down.” 

Is a Bull Market Good or Bad?

A bull market generally indicates that the market is on an upswing: stock prices are rising. To many, this is a good thing, but the long-term investor realizes that it’s neither good nor bad: it’s just part of how the market works.

What Is the Opposite of a Bull Market?

The opposite of a bull market is a bear market, where stock prices are generally trending downwards.

Why Is It Called a Bull Market and Bear Market?

It’s called a bull market when the economy is trending upward because that’s how a bull attacks: by slamming its horns upwards. A bear market, on the other hand, is named after how a bear attacks: by swiping its paws downwards.

The Bottom Line

While it’s possible to trade in your retirement account, caution is key. Understanding your goals is a good place to start, but also keep an eye on the long term: too much trading too frequently will likely hinder, not help, your performance.

Read the original article on Investopedia.