A gambler walks into an Atlantic City casino with $100,000 in hand. He needs to double that $100,000, so he can finally quit his job and retire on the beach in Florida.
Immediately upon stepping foot in the casino, he decides to bet half of it on black on the roulette wheel. He loses. Just like that, he’s down to $50,000. $200,000 seems even more out of reach now.
He has two options – neither one a good one. He can keep gambling in hopes of recovering his losses and get on the road back to $200,000, or he can cut his losses and go home. If he keeps gambling, he faces long odds of getting to $200,000. If he quits and puts the $50,000 under the mattress, he’ll never get to $200,000.
Not all hope is lost, however. What if there were a third choice? A choice that is a proven wealth builder, and that doesn’t involve speculation or gambling. That would be ideal!
Sure it would have been better to start investing in this third option before stepping foot in the casino, but he can’t change the past. However, what he can change is what he does going forward.
This casino example has an analogy in the investing world.
As you get closer to retirement age, the more you should consider pivoting away from high-risk investments like stocks. That’s because investors heavily into stocks are a market crash away from seeing their retirements go up in flames.
Despite the market consistently bouncing back after every crash, even during a panic, it’s hard for investors to resist following the herd and cashing out to cut their losses.
In down markets, for many investors, the flight instinct takes over, thinking that if they don’t sell, they could lose even more money. But as I will explain below, selling out could be the most detrimental step investors can take in that situation.
The problem is when investors sell during a crash, they do so at rock bottom prices. They put themselves in a hole and typically wait too long to reenter the market. Once the waters are safe, and they finally return to the market, they end up paying far more on the upswing than they sold for during the downturn.
Investing from a deficit takes years to recover – years that investors close to retirement don’t have.
The dilemma that potential retirees face in a market crash is if they don’t sell and wait for the market to recover, the recovery may take too long for their portfolios to rebuild enough value to sustain them through their retirements. That’s because unlike their younger counterparts, imminent retirees don’t have the luxury to wait years for markets to rebound.
Older investors caught in this Catch-22 are damned if they do and damned if they don’t. Here’s why:
- If they hang on, although the market will eventually rebound, this could take several years.
- If they liquidate their holdings in a downturn, they’re faced with a similar deficit from which they’ll have to dig out of.
The temptation for many investors will be to cash in their chips and walk away – to quit. The thinking is that it’s better to have something for retirement than nothing.
Here’s why quitting shouldn’t be an option:
Remember back to the early days of your investing.
What were your long-term goals? Most have a goal to achieve a certain level of wealth to retire comfortably. Nobody aspires to have just enough to get by.
Yet, if you’re in the midst of a market crash like the recent one caused by the COVID-19 panic, it would be easy to let fear take over and cloud our long-term objectives.
DON’T LET FEAR DICTATE YOUR INVESTMENTS
DON’T STOP BUILDING WEALTH
Don’t quit investing. If the road back seems daunting, then you should consider pivoting your investment choices. It’s better to adjust than quitting altogether.
You should consider adjusting your asset allocation to ensure your investments align with your long-term wealth objectives.
Even before a market crash, older investors should consider investing in recession-insulated assets. And in the unfortunate event an older investor finds themselves in the position of having liquidated their equity position in a downturn, they would be equally served by looking to these recession-insulated assets.
You’re probably thinking of low-risk government bonds. Low risk means low yields. At bond rates, you think you’ll never be able to rebuild enough wealth to retire. You’d be right if I were referring to bonds, but I’m not. Recession-insulated and low-risk are not mutually exclusive of above-market returns if you’re talking about non-Wall Street assets.
I’m talking about alternative assets.
Alternative assets, including real estate, private equity, hedge funds, commodities, precious metals, startups, and venture capital, behave differently than traditional stock and bond investments that fluctuate with the broader market and economic movements.
There are select alternative assets that not only act as a hedge against recessions and inflation but also generate above-market returns. The ideal alternative asset is one that generates income ideal for compounding wealth quickly.
For older investors nearing retirement who get caught up in a market selloff triggered by collective panic like the most recent one involving the coronavirus, it’s easy to let fear grip us and drive us to quit to cut our losses. But if our long-term goal is to retire comfortably, it would be far better to set aside our fears and adjust our investment approach and asset allocation than doing nothing at all.
Quitting will only ensure that you will not have enough for retirement.
Instead of quitting, all investors – not just those nearing retirement – should consider lower-risk assets not correlated to Wall Street.
Alternative assets are ideal investment vehicles for avoiding the herd mentality that fuels market selloffs. Future market crashes are inevitable, but if you’re in assets uncorrelated to Wall Street, fear will never dictate your decisions again.
If you’re not invested in high-risk stocks, you’ll never have to face the dilemma of holding on to an asset to wait for the rebound or cutting losses then sitting out to wait for the upswing in the aftermath of a crash.
Older investors don’t have the luxury to do either. They don’t have time to wait for a rebound or to wait for an upswing to reenter the market.
What they can do is adjust their asset allocation to something else altogether – alternative assets that will help them recover wealth more quickly than public equities through consistent cash flow while insulating them from inevitable future crashes.