This is the second part in a four part series exploring the usefulness of tactical strategies across generations.  The first part in the series focused on Millennials.  Today, we turn our focus to Generation X.  Our one-pager on Generation X can be found here.

As a whole, Generation X is facing significant financial difficulties.  Individuals in this age bracket took a significant hit to wealth during the financial crisis, with net worth falling by an average of 45% from 2007 to 20101.  Even more problematic is that the prospects for net worth recovery are diminished due to low savings rates and significant debt burdens:

  • 43% struggle to meet monthly expenses on time2
  • 51% consistently carry credit card balances3
  • Total debt is 42% higher than other generations4

For many, current financial burdens are so great that they are being forced to fund today’s obligations with tomorrow’s retirement savings.  A recent PWC survey found that 30% of those in Generation X think that it’s likely they’ll need to use retirement account savings for nearer term expenses5.

As a result of these challenges, members of Generation X are only projected to be able to replace approximately 50% of their pre-retirement income in retirement6.

Generation X’ers will need more from their investments in order to bridge the gap between current and required savings.  At the same time, large investment losses can present short-term issues due to high expense requirements.

We advocate that one key use of tactical strategies for investors that find themselves in this position is as a pivot point between equity and fixed income allocations.

As a simple example, let’s assume that an investor has a 60/40 risk profile.  In order to use a tactical defensive equity strategy as a pivot point, we would allocate to the tactical strategy from both the existing equity and fixed income sleeves.

If we assume a 30% tactical allocation, we would take 15% from equity and 15% from fixed income.  Now, the portfolio is allocated 45% equity, 25% fixed income and 30% tactical.  As the tactical strategy’s allocation changes, the investor’s overall asset allocation will change.

If the tactical strategy is fully invested in equities, then the investor will be overweight equities with an overall 75/25 equity/fixed income mix.  If the tactical strategy goes defensive to protect capital by selling all equity exposure, then the investor will be underweight equities with an overall 45/55 equity/fixed income mix.

With this type of approach, the investor has the ability to dynamically adapt to changing market conditions in an attempt to maximize total return over a full market cycle.

1, 6 The PEW Charitable Trusts – Retirement Security Across Generations

2, 3, 5 PWC Employee Financial Wellness Survey 2014

4 Experian

From 2012-2019, Justin Sibears served as Managing Director and Portfolio Manager at Newfound Research. At Newfound, Justin was responsible for portfolio management, investment research, strategy development, and communication of the firm's views to clients. Justin holds a Master of Science in Computational Finance and a Master of Business Administration from Carnegie Mellon University as a well as a BBA in Mathematics and Finance from the University of Notre Dame.