Investing for retirement isn’t just about picking the right stocks or funds. According to financial expert Suze Orman, how you manage your emotions can make a big difference in the returns you actually earn.
The Hidden Cost of Emotional Trading
A recent Morningstar report shows just how costly it can be to let emotions guide your decisions. Over the 10 years ending in 2024, the average annual return for mutual funds and ETFs was 8.2%. But the average investor earned only 7%.
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“The 1.2 percentage point difference between the market return for those funds and the average asset-weighted return investors pocketed is the result of mistimed trading,” Orman writes in her blog. “Investors earned less on average because they bought more shares ahead of stocks falling and sold more shares ahead of stocks rebounding.”
In other words, “Emotion-filled trading tends to not work out,” as Orman puts it. Getting caught up in the excitement or fear of the market often backfires, she explains.
Why Patience Matters
Orman points out that even a seemingly small difference in returns can add up over decades. She gives a clear example: if you invested $10,000 and it grew at 8.2% annually for 10 years, it would be worth about $22,000. Let it grow for another 30 years at the same rate, and you could have over $230,000.
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Now, if the same $10,000 only grows at 7% because of emotional trading, it would be worth less than $20,000 after 10 years — and about $150,000 after 40 years. That’s an $80,000 difference from the same starting investment.
“You invested the same $10,000, but there’s an $80,000 difference in what you could end up with over 40 years based on being a less emotional, patient investor,” Orman says.
Staying Engaged Without Panicking
Patience doesn’t mean ignoring your investments. “We all need to be engaged custodians of our retirement security,” Orman advises. “That means having an asset allocation strategy… and then checking your portfolio at least once a year to make sure it still reflects your goals.”
She also notes that as retirement nears, it may make sense to reduce your overall investment in stocks — but not eliminate them entirely. This allows for growth while managing risk.
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Active Trading? Proceed With Caution
For those who enjoy trading, Orman recommends limiting it to a smaller portion of your portfolio. “Trading can only be successful when it is based on a well-reasoned investment theory or insight,” she warns.
Before buying or selling, ask yourself if your emotions are driving the decision. If they are, it may be better to wait.
The Bottom Line
Orman’s message is simple but important: emotion-filled trading tends to erode returns, while patience and a disciplined approach pay off over time. By staying focused, reviewing your portfolio annually, and avoiding impulsive trades, investors can give themselves a much better chance of reaching their retirement goals.
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