Gen Z investors are working to protect their portfolios from political uncertainty as the midterms approach, but their anxiety could end up costing them.
According to a Nationwide Retirement Institute survey, 72% of Gen Z investors said they have already changed their retirement savings or investment portfolio in preparation for the November election. That’s far more than the 17% of baby boomers who said they do the same.
But the gap is not a rush for the exits. According to the survey, as many Gen Z investors added money to take advantage of current conditions as turned to safer investments. The first generation to grow up with free trade on their phones views elections as a market event.
Baby boomers’ decision to wait may have less to do with hard-won wisdom than with their situation in life. Most baby boomers will reduce their savings or close to it, so for them, a portfolio “change” usually means selling. They’re also more likely to already have an advisor — 43 percent, according to Northwestern Mutual — and for stocks held in taxable accounts, holding until death allows heirs to avoid the capital gains bill altogether.
Across generations, 40% of investors have made changes ahead of the Nov. 3 election, which will determine which party controls which chamber of Congress.
Mark Hackett, chief market strategist for Nationwide’s investment management group, said Fortune that younger investors are not necessarily more fearful than older generations. Instead, they are changing the way they interact with financial markets as well as the way they respond to the massive amounts of financial information and trading tools at their disposal.
“Young investors have grown up in an environment where investing is highly mobile, social and increasingly real-time, so adjusting a portfolio can feel less like a major decision and more like an ongoing process with almost no friction between a security, an investing app and a potential portfolio adjustment,” Hackett said.
This accessibility can be both good and bad. While younger investors benefit from unprecedented access to financial information, it also means they have more opportunities to make impulsive decisions based on current events rather than a company’s financial data or an analysis of economic conditions.
“So the question is less about risk tolerance or volatility and more about whether greater access to information improves decision-making or simply increases the temptation to trade,” Hackett said. “The latter can be fatal for the longevity of the portfolio. »
“For younger investors, frequent portfolio changes can interrupt the power of compounding over decades,” he said.
Stay invested
The survey, conducted between late August and early September, included 2,029 U.S. investors with at least $10,000 in investable assets and 538 financial advisors and financial professionals.
Despite the risk of turbulence caused by the midterm elections, the financial advisors interviewed recommend staying the course. More than half said maintaining an existing investment strategy is usually the best approach during an election year.
Previous market performance helps explain their advice.
Since 1950, the S&P 500 has consistently risen in the 12 months following midterm elections and generated gains of 15% on average, according to JP Morgan Asset Management. Although the past cannot predict future performance, selling during uncertain times can be a gamble.
Hackett said he recommends investors maintain a diversified portfolio and only rebalance their investments periodically based on desired risk exposure.
This is not to say that investors should never make changes. Hackett said adjusting investments to reflect personal financial goals, changes in risk tolerance or changing income needs are good reasons to make changes. They must nevertheless exercise caution, he added.
“Investors should be careful not to confuse a source of uncertainty with a source of sustained deterioration in long-term returns,” he said.
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