It’s About Time That Baby Boomers Took Our Warnings Seriously

For some time now we have been warning baby boomers that they can’t afford the investment risk they have been taking, but nothing brings home the reality of risk better than a full-blown panic. No one knows yet how broadly the Coronavirus will spread and what the full extent of its economic consequences will be, but stock markets around the world have declined more than 15% in just 16 days, stripping away $10 trillion in market value. A common definition of a market crash is a loss of 20%.

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Here are some examples of our previous warnings. We don’t want to be an “I told you so.” We do want boomers to get in touch with your ability to tolerate risk as they transition from working to retirement. After all, investment risk at this time in your lives cannot be understated. Excess risk has dire consequences that damage secure retirements. Unlike younger people with a lifetime of paychecks ahead of them, baby boomers don’t have time to recover from a market crash.

Some of Our Warnings:

The length of this list, and these titles, may suggest to you that we are fear mongers, and you’d be right. We fear millions of boomers will face the dire consequences of excess risk. This is particularly true when we have had years of positive markets. Boomers get lulled to sleep thinking the good times will last forever. That is not true. The markets are always cyclical. They just need a catalyst (virus, oil war) to change direction.

We have not made forecasts of market crashes. Rather, we’ve pointed out that a crash is likely during this decade, a decade that finds most boomers in the Risk Zone spanning the 5-10 years before and after retirement. This is called the “Risk Zone” because investment losses sustained in this period can result in sacrifices to lifestyle, deferred retirements, and running out of money later in life.

 

What Now?

If you’re a baby boomer, use this opportunity to reduce your investment risk. Recent market losses have done part of the job for you by reducing your equity exposure. Our recommendation for those in the Risk Zone is to be no more than 30% in risky assets, defined as equities (stocks, real estate, commodities, etc.) and long term bonds, with the balance in Treasury Bills and intermediate TIPS (Treasury Inflation-Protected Securities). If your current allocations are above our recommendation, you should consider selling to balance your allocations.

We do not recommend selling to time the markets. You’ll just be disappointed if markets recover, as they eventually will. Sell so you can sleep at night, limiting risk to what can be afforded in your personal Risk Zone.

 

This Too Will Pass

In its report on past market declines, The Death of Equities Redux, Janney Montgomery Scott shows that markets generally recover in 5 years, and there’s been only one instance when recovery took longer than 10 years. Furthermore, there have been five recent instances of health scares that all seemed awful at the time, but were fairly quickly resolved – SARS, H1N1, MERS, Ebola and ZIKA. Coronavirus might be worse, but science has had five recent rehearsals that suggest otherwise.

Baby boomers should use this scare to protect themselves, reducing exposures to risky investments.