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One of the advantages of youth is that, thanks to time, younger investors can embrace risk their older counterparts should not.
With the benefit of longer time horizons a market participant that is, say, 25 or 28 today can embrace growth stocks, eschew large allocations to bonds and ride out bear markets with more ease than older investors. However, some research suggests the opposite may be playing out in today’s investment landscape.
Not only are plenty of millennials and Gen Zers surprisingly comfortable owning large amounts of fixed income assets, but their baby boomer and Gen X peers are embracing risk. Specific to Gen X, increased risk-taking, though not necessarily advisable, may be viewed as a necessary evil because this age bracket is behind on retirement planning. With life expectancies increasing, Gen X’s penchant for risk is understandable because it could take a while for the benefits of the great wealth transfer to fully materialize for that generation.
Those factors underscore the need for Gen X and boomers to work with advisors. Add to that, many retail traders in those age groups are making decisions (and mistakes) rooted in emotion – something else advisors can help with.
Gen X Angst Coming Home to Roost
Perhaps it was all that pent up teen angst and grunge rock from the early 1990s driving this, but apparently, Gen X is an emotional lot and that’s borne out in trading activity in their discretionary accounts.
A recent City Index survey indicates 35.4% of Gen Xers admit to having trading decisions influenced by emotion. Perhaps making matters worse is the 31.4% of boomers copping to elevated risk-taking in the aim of recovering from prior trading losses. Believe it or not, Gen X engages in much more emotionally charged trading than does Gen Z.
“The age group most likely to have their trading decisions consistently influenced by emotions were 41-60 year olds, with this sentiment selected by over a third of this demographic (35.4%). In comparison, just 10.1% of 18-24 year olds surveyed considered emotions to be a significant factor in their trading approach,” according to City Index.
Another point for advisors to consider: Fewer than 10% of those polled will wait out losses. Rather, they opt to rapidly sell when they’ve got a loser on their hands. That’s a good news/bad news scenario. Good news because, in trading, there’s nothing worse than letting small mistakes morph into major catastrophes. Bad news because experienced investors know that markets don’t move up in straight lines nor are all days “green days.”
Toss-Up on Confidence
Confirming that working with financial pros and embracing broad funds is the way to go for many investors is the following data point from City Index. Just over 34% of traders surveyed by the research firm feel confident before putting on a trade while a comparable percentage don’t.
That’s too much in both categories because not all confident traders will make money, but a massive portion of those lacking esteem will lose capital. Those are bad odds, but positives in terms of advisor involvement.
Related: The Positive Impact of Thorough Planning for Clients