Bad Advice for Younger Generations

Young couple I read a Wall Street Journal article recently written by a reporter for whom I have a great deal of respect, but who acted as a conduit for a fundamentally flawed (supposed) majority opinion on the part of some financial advisors—that risk taking in investing and financial planning naturally leads to reward.  The article is entitled, “Take some chances, Gen X,” and chides 30-somethings for making capital preservation an investment priority, warehousing cash in defense of a job loss and eyeing debt elimination as a goal.


I’m not denying the relationship between risk and return.  But while it is true that higher returns are accompanied by a greater degree of risk, the inverse is not promised.  It’s a classic investing blunder to presume taking higher risks will naturally result in a higher rate of return.

Is it possible that while the boomer advisors were pining over outdated investment “science” and Monte Carlo retirement simulations, they missed the simple math their younger clients discovered—that it’s easier to lose money in the market than it is to make it?  If you’ve lost 10% in your portfolio, it will take 11% to get back to where you started.  If you’ve lost 20%, you’ll need to make a 25% rate of return.  If you, however, get slammed by a 50% loss, you need to make a 100% rate of return to recover your losses.  Is it possible that youth and a stomach for losses isn’t actually the optimal investing posture?

The article wisely captures the reasoning behind the financial common sense of younger generations—“Many Generation X and Y investors have watched plunging financial markets destroy their parents’ retirement plans.”  That sounds eerily similar to words spoken by Gen X’s grandparents, the Depression Babies.  While it certainly is true that the intense, deep pain of the Great Depression may have created a syndrome in which some were too conservative, the Greatest Generation’s aversion to debt, skepticism of equity-heavy investing and penchant for emergency cash reserves may be exactly the foundation young investors need for a fruitful future.

The apparent concern of the "advisors"?  (And I’m sure it has nothing to do with the fact that they can’t charge fees and commissions on cash stored for emergency reserves or used to pay down debt…) They’re “…concerned that the low risk tolerance of some of these investors may ruin their retirements too, by leaving them short of funds when they get there.”  Again, the advisors miss the mark.  The point of financial planning and investing is not to retire, but to live a better life now and in the future.  Gen Xers, realizing they may be working indefinitely, thanks to companies and a federal government that raided their retirement promises (pensions and Social Security), are choosing jobs they love over those that pay the very most and seeking the nuanced balance between saving for the future and the present and everything in between.

Maybe the article should have been headlined, “Generation X shows more financial wisdom than financial advisors.”

Tim Maurer, CFP®

Financial Planner and Gen Xer