After decades of hard work and diligent saving, most people see retirement as a chance to enjoy the fruits of their labors. But for some, retirement also means taking a more active role in the markets—a trend to which Lou Mercer, a regional manager at Schwab Trading Solutions in San Francisco, can attest. “I’m fielding more questions from retirees than ever before,” he says. “Many have long been interested in the subject, but only now do they have the time and resources to get involved.”
Beyond the thrill, many retirees are drawn to trading for its potential to generate extra income—something that may have eluded recent retirees as a decade of rock-bottom interest rates undercut returns across income-producing investments. “Trading can absolutely generate income,” Lou says, “but retirees in particular need to understand the risks involved.” In addition to potential losses, for example, there’s the cost of the transactions themselves. Most brokers charge a commission when you buy or sell a stock, and those fees can add up.
Here are Lou’s top tips for trading during retirement:
1. Change your mindset
Inexperienced traders often fail to establish a plan for profit taking or an exit strategy in advance, Lou says. Instead, they buy stocks they believe in and trade out of them when they go up, typically for small gains. When a stock moves against them, on the other hand, they can be reluctant to part with it, preferring to wait for the price to rebound—with sometimes devastating consequences. “When you reach retirement, you don’t have as much time to make up for losses,” Lou says, “so they can hurt a lot more.”
Lou recommends that retirees looking to trade stocks divide their savings into three buckets: invest, trade and speculate. The majority of your portfolio—no less than 75%—should be invested for the long term, and include bonds for income, stocks for growth and cash equivalents to help you weather downturns. Up to 20% can be used for active trading, with the remaining 5% reserved for speculative ideas that carry the greatest risk—and, potentially, the greatest reward. Though as a practical matter, you should invest only as much as you’re willing to lose in this last category.
2. Pick stocks differently
When it comes to researching stocks, Lou says retirees might be tempted to look for those at 52-week lows. After all, a common mantra among long-term investors is “buy low, sell high.” But for near-term trading, the key is often to “buy high and sell higher,” Lou says. “Unfortunately, retirees have been focused on the long term for so many years that they have a hard time changing their approach.”
Case in point: After the most recent U.S. presidential election, financial and industrial stocks surged on the promise of new government policies that would reduce the number of regulations and boost infrastructure spending. Many investors assumed these stocks couldn’t rise any further and stayed on the sidelines—only to miss out as many continued their ascent. “Unlike investors who typically have time to wait for a low-value stock to rise, retirees should focus on stocks that are already working, and have an exit strategy if and when they stop working,” Lou says.
3. Sell stocks differently
Because average investors are focused on the long term, they’re rarely concerned with short-term price fluctuations. But for traders, those fluctuations can make or break a transaction—which is why they must be ready for a trade to move against them.
For this part, Lou advises active traders to set a stop-loss order—a price below the current price that will trigger an automatic sale—whenever they place a new trade. “Stop losses take the emotion out of sell decisions,” he says. “Otherwise, you might try to convince yourself to stay in the position, leaving open the possibility of significant losses if it keeps trending lower.”
But how do you determine the right stop-loss price? Lou’s rule of thumb is to limit losses to one-third to one-half the potential reward. For example, if the goal is a profit of $6 per share, then set a stop-loss price at $2 to $3 below the purchase price.
After the profit target is hit, then a trailing-stop order may be placed, which automatically adjusts the stop-loss price higher as a stock rises. Lou specifically recommends trailing stops for retirees who are frequently away from their computers or devices and so can’t continually monitor their positions. “Let’s face it, you want to enjoy yourself in retirement,” Lou says, “not be glued to some machine.
What You Can Do Next
- Interested in starting to trade? Call 888-245-6864 to speak with a Schwab Trading Services representative.
- Read more insights from Lou and other trading experts.