Young don’t see value in rolling the dice

Posted on 17. Mar, 2010 by admin in Finance, Investments

Coming off one of the worst decades for stocks, they take a more conservative outlook on investing

By Jeff Benjamin
March 7, 2010 6:01 am
Advisers who work with clients in their 30s are witnessing something they’ve never seen before from younger investors: high levels of risk aversion.

“I’m talking with a lot more younger clients today who are worried about avoiding losses, and wanting to take the kinds of conservative approaches that have historically been appealing to older folks,” said Clinton Struthers, who advises on $110 million as the owner of Struthers Financial Services.

“It used to be all about “the sky’s the limit’ when it came to advising younger people,” he added. “But now, I see their whole outlook is more conservative as a result of so much uncertainty about the future.”

That caution, as the financial planning community is realizing, is grounded in the general economic turmoil and investing experiences of the past few years.

Any multiple-decade snapshot of the stock market can usually be made to look optimistic, but for most people in their 30s, a personal investing history doesn’t go back much farther than 10 years.

In that time, the financial markets have experienced two very harsh cycles — leaving most investors about where they were a decade ago.

With that in mind, it’s understandable that today’s thirty-somethings might be among the most gun-shy of generations.

Understandable, but not acceptable — at least not if there’s any hope of staying ahead of taxes and inflation.

“The biggest hurdle right now is to get those people in their 30s to step off the sideline and embrace some risk,” said Tim Knepp, chief investment officer at Genworth Financial Asset Management, a firm with $7 billion under management.

Mr. Knepp underscored the recurring theme that is being presented to risk-averse young people across the land: Time is on your side.

“The market pays you to take risks, and 30-year-olds should keep that in mind,” he said. “When you’ve got to make up losses, your greatest risk is not portfolio volatility, it is loss of purchasing power.”

Encouraging younger investors to save as much as they can — and then invest as aggressively as they can stomach — seems to be a standard message throughout much of the financial planning industry these days.

But there are still a variety of ways to execute a plan once the investor is on board.

“For younger people, their biggest asset is their potential income stream, and their capacity to bear risk is very high,” said Neal Ringquist, president of Advisor Software Inc.

“If you’re in your 30s, you could easily be 100% in stocks and afford to lose 40%, and still make it up over your lifetime,” he added.

Advisor Software is a financial technology firm and a registered investment adviser that manages more than $200 million for other financial advisory firms.

Because people in their 30s, in general, are wealthier in income than assets, Mr. Ringquist views salaries as an asset under the resource category of a household balance sheet.

Other examples of resources are real estate and investments.

The other side of the household balance sheet is claims, which are all legal financial liabilities, such as debt.

“We’re looking at the household through a balance sheet to determine a capacity to bear risk, not just risk tolerance,” Mr. Ringquist said.

With that in mind, he is a strong proponent of life insurance and disability insurance, which are rarely considered high priorities among younger investors, especially if they’re single or childless.

“Looking at the household balance sheet leads to certain implications that people might not always realize,” he said. “Because the income stream is the biggest asset, you need to protect anything that might cut into it.”

Not all financial advisers factor in the personal residence as part of an overall financial plan, but managing the cost of a home should be a priority for younger clients, according to Bert Whitehead, president of Cambridge Connection Inc.

“There were a lot of young people who made mistakes in real estate during the run-up,” said Mr. Whitehead, who charges clients he advises a flat or retainer fee.

“People paid too much for the houses they were buying, and then put the rest of their money in stocks or whatever,” he said.

While Mr. Whitehead believes in appropriate use of aggressive, long-term investing strategies for younger investors, he also favors maintaining cash reserves that could be tapped to cover mortgage payments in the event of a job loss or illness.

Taxes are another issue that should be considered early, according to Laurence Greenberg, president of Jefferson National Life Insurance Co.

He recommends low-cost variable annuities once the allocations to traditional qualified retirement plans such as 401(k)s and IRAs have been maxed out.

“The recent dislocation in the markets has made everyone question whether they’ll have enough money when they’re ready to retire,” Mr. Greenberg said. “The best way to make sure you have enough money is to save it, and when saving, there’s nothing more valuable than tax deferral.”

As with any strategy, the key is finding one that works and sticking with it.

That’s something a lot of investors — as well as a lot of financial advisers — have struggled with in the wake of the market’s upheaval.

“One of the benefits of being in your 30s is, virtually any investment strategy can work pretty well because you have so much time,” said Michael Ball, president of Weatherstone Capital Management, which manages $425 million.

“The problem is, people in their 30s are impatient,” he added. “They’ll try something once and if it doesn’t work right away, they just write it off.”

Long-term outlooks and historical performance charts notwithstanding, it ultimately boils down to suitability, and that might be where advisers face their greatest challenge.

“All you can do, as financial advisers, is encourage your clients to be aggressive enough,” said John Diehl, senior vice president of business development at the Hartford Financial Services Group Inc.

“The investment time frame will help determine the asset allocation mix,” he added. “I’d say for people in their 30s, a minimum 80% in equities makes sense, but not if somebody is going to lose sleep.”

E-mail Jeff Benjamin at jbenjamin@investmentnews.com

Tags: conservative outlook, investing