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Baby Boomers May Be the New Winners

Baby Boomers have nine lives. As teenagers, they benefited from profound yet positive social change in the 60′s and 70′s. As young adults, they profited during the “Greed is Good” era of the 80′s. As adults approaching middle age, they fluffed their nest eggs during the startup boom in the 1990′s and the reduction in taxes in the early 2000′s.

Not all has been rosy for Baby Boomers. Nevertheless, of all the generations alive today the average Baby Boomer who played his or her cards right in past decades may actually have the most economic stability of them all. So while 50 to 60 year old Baby Boomers are not only the new 40, they may also be the new winners.

For example while all of our retirement accounts have been impacted by multiple market hits over the past decade, the average Boomer has been invested for a longer period of time than investors in Generations X and Y. As a result, a Baby Boomer investor may have a lower cost basis on his or her investments as well as greater diversification which may have helped temper risk and volatility.

Since Baby Boomers are starting to retire, they ideally have already positioned their portfolios into Large Growth or Value and dividend-paying stocks. If the market continues to be range-bound as we collectively attempt to determine which end is up, dividend-paying investments may help support portfolio growth while prices stay flat.

Boomers also generally began working prior to the introduction of 401K’s as the primary retirement savings vehicle for employees approximately 30 years ago, and thus may have the elusive pension plan. The jury is still out on whether states will be able to support pension payments given the state of the economy, but if local governments are smart they’ll figure out how. Regardless, a Boomer’s career is often characterized by consistent and long-term employment at one employer which may have translated to consistent 401k or IRA contributions.

Boomers also may have purchased their current home in the 1980′s or 1990′s, and may not be saddled with an underwater property.

All generations have their own troubles, but it’s no coincidence that it’s the Baby Boomers of the family whose shoulders other family members are generally leaning on in today’s economy. Money and economics are relative. So while Charlie Sheen may have declared himself as a winner recently, he may have nothing on the baddest generation of them all.

Risk or Return…or Both?

Imagine for a moment you were presented with the opportunity to swim across the Hudson River in a contest for $1M.  The unique aspect of this content is that as long as you crossed the river from New York to New Jersey in under 20 minutes, you would be given $1M.  You didn’t have to be first — you just had to beat 20 minutes.

What would you do?  Would you jump in the water and swim as hard as you could for 20 minutes and pray that you made it in under 20 minutes?  Or would you determine the best area of the river to make the journey, put on a life vest and swim hard enough so that you could sustain your endurance yet cross in under 20 minutes?

If you’re a rational person, you likely picked the latter.  With your goal in mind, you would cross the river with a plan for managing the unexpected.  If that’s your perspective for crossing a river in a mythical contest, why is that perspective often lost in the real world of investing?

Money can breed emotions that often aren’t rational.  Which is why working with a professional that you know and trust and who may be more objective may be suitable for some investors.

I always say to my clients that it’s very easy to put together a portfolio of investments.  The difficult part of an advisor’s job is putting together a portfolio that has a strong probability of meeting a client’s objectives.

Step one is determining the return that a client needs in order to hit his or her goal.  The next critical step is determining the appropriate level of risk that may be taken in order to reach that goal.  In portfolio construction, both go hand in hand.

Future return may be estimated by looking at a portfolio’s historical returns — ideally, during similar times in the economy such as during a past recession.  Past performance is not a definitive indicator of future performance, but may help you gain clarity on how an investment may perform.

Risk in my book is the chance that your portfolio won’t provide the performance, or return, that you need in order to hit your goal.  This a Modern Portfolio Theory point of view.  As a result, leveraging factors such as a client’s personal tolerance for risk, the portfolio’s standard deviation (which is a tool for measuring volatility), R-squared, beta and alpha may help determine the chance that a portfolio may or may not hit a return goal.

A common misconception is that in order to produce higher returns, you have to take on higher levels of risk in your portfolio.  But if you know for a fact that you’ll receive higher returns, the implication is that the investment is not necessarily riskier given the certainty of making high returns.  Unfortunately, there’s no guaranteeing returns.  There is more guarantee, however, in managing against not landing in the ballpark of the return that you need.

By doing the latter, you may put yourself in a better position to cross the river instead of being hit by an unexpected wave and petering out midway through your journey.