In our business, we talk a lot about retirement planning for your “serious money” – the money you cannot afford to lose because you depend on that to generate income for the rest of your life. We focus a lot on the baby boomer generation because they are either in or approaching retirement. Baby boomers feel the worth of their serious money.
But there is another generation right behind them – the Gen Xers – that we can’t overlook. Gen Xers have the benefit of time on their side to truly build on their serious money nest egg. However, many of them tend to be passive investors focused on growth. If Gen Xers could feel the worth of their serious money now, it could put them in a much better position when they reach retirement age. So how should Gen Xers be looking to position their resources?
Don’t Buy Into the Hype of Passive Investing
Passive investing has been all the rage, with the fantastical notion that if you passively invest in low-cost index funds, all of your dreams and financial goals will come true. The passive craze has taken off since 2008/2009, and the “passive versus active” debate has been ongoing since then. We view the passive craze as smoke and mirrors in the investment marketplace, and it can derail investors from actually reaching their retirement goals.
The inflation of asset prices was brought on purposefully by the Federal Reserve and the U.S. government. They provided a complete backstop to the markets with zero-interest-rate quantitative easing, and now, stimulus program after stimulus program. They are ensuring that assets go higher because when people feel wealthier, they tend to spend more money, which drives 70% of the economy.
But make no mistake, passive investing may work in a rising market, but it can be an absolutely devastating disaster for investors on the downside. Gen Xers may not have felt the impact of prior bear markets, like the NASDAQ in 2000 through 2002, down almost 80%. But if you’re in retirement, taking those kinds of losses would be game over for your retirement income.
If Investing Seems Easy, Think Again
If you’re a Gen Xer who perhaps already achieved the pinnacle of your earning years or are steps away from it, you might be of the mindset that trying to accumulate as much as possible now is the right strategy. But the Gen X generation needs to be careful.
It may look easy to invest in stocks on digital platforms like RobinHood. When everything’s going up, it seems like an easy thing to do right now. But when things start to go down fast, it’s a big problem if you can’t get out of the way quick enough.
Right now, we’re at all-time highs with historically high valuations. Having a balanced approach can help mitigate potential risk instead of going all-in because it looks easy. Investing is never easy. It’s actually really hard (trust us, we’ve been doing this nearly 40 years), so when markets make it look easy, it’s time to question your fully invested bets.
A Balanced Approach
Right now, we think the best approach from an asset allocation standpoint is a balanced one, a combination of active risk management and passive. It’s not wrong to want to take some risk in your prime earning years to maximize returns, but balancing with risk mitigation can help protect your hard-earned money when the markets turn volatile.
So if you’re searching for higher returns and want to stay fully invested, you could aim for that by taking a portion of your money and staying passive. Just don’t bet the farm that the markets will go higher forever. Our goal is to help investors avoid the false sense of security that can come from passive crazes like that of recent years so that all investors can live the life they want in retirement.
All data in this article provided by Bloomberg.
The views presented are those of Don Schreiber, Jr. and Matt Schreiber and should not be construed as investment advice.
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