Millennials, the children of the stock-loving Baby Boomers who helped fuel the best-ever bull market in the 1990s, haven’t yet developed a good working relationship with the market like mom and dad did.
Now mostly in their 20s and early 30s, the people making up the nation’s largest generation have yet to embrace the concept of stock investing to meet long-term goals like funding retirement, surveys show. Only one in three Millennials say they invest in stocks, a Bankrate.com survey has found. Six in ten have less than $10,000 saved for their post-working years, according to Ramsey Solutions’ 2016 Retirement in America Survey.
The top reasons for avoiding individual stocks like Apple, or equity funds like Vanguard’s Growth and Income Fund? Nearly half of Millennials say investing is “too risky,” a BlackRock study says. And four of ten say they don’t have enough spare income to squirrel away for the future, according to a just-released financial literacy survey from Stash, a financial app.
The fear of risk is understandable. Millennials experienced and were scarred by the 2008 market collapse sparked by the financial crisis. Before that, older Millennials remember the bursting of the internet stock bubble in 2000.
But there is a hint of change. A look at Millennials who have already made the jump from saver to investor suggests that they may embrace stocks one day.
Still, the frosty relationship between most Millennials and stocks isn’t a good thing for their future nest eggs. Nor is it necessarily good for the long-term health of the market, which could find itself starved of the cash it needs to thrive if the roughly 75 million Millennials don’t start putting money in more aggressively.
The reason they need to invest, Wall Street pros argue, is that stocks have delivered bigger returns than both cash and bonds over the long-run. Large-company stocks have generated compound annual returns of 10% since 1926, according to Morningstar, vs. a 5.6% return on long-term U.S. government bonds and 3.4% for cash. A $1 investment in stocks at the start of 1926 was worth $5,390 at the end of 2014, compared with just $132 for bonds and $21 for cash.
A portfolio invested mostly in cash, a conservative approach favored by many Millennials, just won’t get young people where they need to be financially when their working days are over decades from now.
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“There’s a symbiotic relationship: The market needs demand and participation from Millennials, and Millennials need to be able to leverage the long-term growth potential of the stock market,” says Ken Hevert, senior vice president of retirement and college planning at mutual fund company Fidelity Investments. “The bigger risk for Millennials is not investing for growth.”
“Are the Millennials important to the market? Absolutely,” says JJ Kinahan, chief market strategist at TD Ameritrade. “You want to make sure this generation is as engaged in the market as their parents were.”
It isn’t just anxiety that’s driving their reluctance. Millennials are also burdened with costly student loans. Median education-related debt is $19,978, according to the 2016 Wells Fargo Millennial Study. College loan balances for those between ages 18 and 34 at the end of 2013 were nearly three times what they were in 1989, U.S. Census Bureau data show. Also slowing this generation’s financial gains are careers that took flight later because of a lack of jobs after the Great Recession.
“They’ve had some rough knocks,” says Sarah Holden, senior director of retirement and investor research at the Investment Company Institute, a trade group for mutual, exchange-traded and other funds.
But with jobs more plentiful and wages edging higher, Millennials who commit to trimming their spending and freeing up cash to invest can get their finances back on track.
“It’s been bleak for a lot of Millennials, but it doesn’t have to be that way forever,” says Andrew Cohen, an ex-Wall Street trader who teaches finance at Old Dominion University in Norfolk, Va. “They should not fear the stock market. They can change things. It’s up to them.”
The question is whether Millennials, as they get older, climb the career ladder, earn more money and start focusing on how their finances might look 20 or 30 years from now, will embrace investing like Boomers.
Life’s financial challenges will eventually lure Millennials into the stock market, some market professionals say. As they get married, have kids, buy their first home, and start realizing they have to save for college and retirement, they will get more active. “Investing is a part of growing up,” says Tobias Levkovich, equity strategist at Citigroup.
Some behavioral finance pros, or experts who study how psychology affects investment decisions, say young people won’t fear the stock market forever. “I don’t think there is any reason to believe Millennials are more risk averse than other (generational) cohorts,” says Richard Thaler, a professor at the University of Chicago’s Booth School of Business.
But skeptics question whether Millennials will ever feel comfortable owning stocks, after seeing the devastation caused by the market’s 50%-plus market drop from late 2007 through early 2009.
Charles Biderman, chairman of TrimTabs Investment Research, a firm that measures the market’s health based on cash flows in and out of stocks, says Millennials will be just as hesitant to invest in stocks as the generation that grew up during the Great Depression after the 1929 stock market crash. The Dow Jones industrial average, he points out, didn’t surpass its 1929 high until the mid-1950s, or more than 20 years later. “I don’t think Millennials will ever trust the stock market,” he says.
Woody Dorsey of Market Semiotics, a behavioral research firm, says don’t expect the Baby Boomers’ kids to invest like their folks did: “It’s just not going to happen,” he says. “Things change. There’s a deep cultural disaffection with the market. It’s a liability.”
Some experts, however, don’t fall into either the bull or skeptic camp. They point out it’s too early to predict to what extent Millennials will own stocks.
“It’s hard to say, given we don’t have the longitudinal data on Millennials to know whether they are truly different from, say Baby Boomers, or Gen Xers, or if they will become more interested in active investing as they grow a bit older,” says Hal Hershfield, an assistant professor at UCLA’s Anderson School of Management.
Some Wall Street pros insist Millennials need the market more than the market needs them. They note that stocks have more than tripled in value since the 2009 market low without any meaningful participation from individual investors. They emphasize that there’s plenty of other buyers of U.S. stocks to push prices higher, including corporations that buy back their own shares and foreign investors looking for investment opportunities in America.
On the other hand, Wall Street firms need Millennials’ cash to grow their own businesses through fees and commissions. That’s why they are reaching out to them aggressively, via the internet, social media, podcasts, mobile phones, and new, lower-fee product offerings, in an effort to get them more jazzed about stocks and investing.
“The nature of things is people are people,” says Jonathan Golub, chief U.S. market strategist at RBC Capital Markets. “This younger generation will eventually be tomorrow’s investor.”
Surveys depict Millennials as falling short when it comes to investing for the future.
But what Millennials say, and what they do, are very different.
Fidelity Investments says they are opening and funding IRA accounts at a faster rate than other generations. TD Ameritrade says they now account for up to 40% of new accounts.
Millennials, it turns out, care more about their finances than their survey responses suggest. The ones that do invest are buying stocks and investing in funds just like Baby Boomers have done for decades.
In short, they may not be in as bad shape as feared.
Nearly 65% say they are “positive about their financial future,” BlackRock’s study found. And despite talk of them preferring to spend money on experiences rather than put it away in a 401(k) or IRA, more than 60% say they are “saving for retirement,” according to Stash’s survey.
“What we have here is a classic mismatch between perception and reality,” concluded Merrill Lynch’s Private Banking and Investment Group in a report titled “Millennials and Money.”
Data from the Investment Company Institute debunks the idea that Millennials are way behind in investing compared with Baby Boomers at a similar stage in their lives.
Households headed by Millennials made their first mutual fund purchase at the median age of 23, compared with Baby Boomers who didn’t buy their first funds until they were in their thirties, an ICI survey released in October found. Similarly, 59% of Millennials say they started saving for retirement before they were 25, compared with 28% of Boomers, according to American Funds’ study released last fall titled “Wisdom of Experience: Lessons learned from Millennial, Generation X and Baby Boomer Investors.”
Millennials can thank their employers for turning them on to stocks and introducing them to 401(k)s.
“Many Millennials are introduced to investing at work,” says ICI’s Holden. Most investors in their twenties (60.4% at the end of 2014) are invested in target-date retirement funds through plans at work, the ICI says.
These funds, which are often the default option in 401(k) plans with automatic enrollment, are broadly diversified among stocks, bonds and other assets. The beauty of these funds is the younger an investor is, the higher the allocation to stocks. Millennials also benefit from regular investments into these funds through payroll deductions.
This new investment option gives Millennials a built-in advantage over their parents. Years ago, what funds to invest in and how much of a portfolio should be devoted to stocks or bonds was up to the individual.
“The Millennial investor is significantly better off investing today as a new entrant to the workforce than workers 30 years ago,” says Francis Kinniry, principal in Vanguard Investment Strategy Group.
Millennials have to be do-it-yourself investors. Unlike their parents, most don’t receive company pensions that pay them a lump sum or monthly stipend in retirement. Only 5% of Fortune 500 companies offer so-called defined benefit plans, down from nearly 50% in 1998, according to benefits consultant Willis Towers Watson. Nearly all offer 401(k) plans.
This young generation of investors, despite claiming in surveys that they are risk averse, will also dive into stocks they know a lot about, like social media companies Facebook and newly public Snap. They also put money into low-cost exchange-traded funds, or ETFs, which track broad stock indexes like the Standard & Poor’s 500. BlackRock says 33% of Millennials now invest in ETFs, more than Baby Boomers and Gen Xers. They’re also opening accounts with brokers that offer low fees, low minimum investment requirements and the ability to monitor and trade using their smart phones and other gadgets.
When Snap first sold shares to the public on March 2, Millennials accounted for 38% of the buy-and-sell activity online and via smart phones at Stockpile, a firm that pioneered the use of gift cards to buy stock. On Snap’s IPO day, Stockpile saw 10 times its normal daily sales.
“There is something in their DNA that makes them want to own what they know and love,” says Stockpile’s CEO Avi Lele. “They weren’t buying a pack of bubble gum, they were buying part of a company and they knew what it meant.”
Adds Stash’s CEO Brandon Kreig: “Millennials are everyone. They are Uber drivers. Engineers. Workers at BestBuy. People in the military. They want to invest, but many just don’t understand. Many have no idea you don’t have to be rich to invest. It’s about financial education. Young people don’t need to be scared of investing. They just have to start.”
* START SOONER, NOT LATER. Saving for tomorrow has to start today. Putting it off means you will have to sock away more cash later to make up for lost time. Getting started is often the hardest part. “Inertia keeps people from investing,” says Stockpile’s Lele. “It’s like starting a diet or exercise program.”
* JOIN THE PLAN. That 401(k) plan offered at work is your entree to investing. Opt in, not out. Have a few dollars taken out of your check each pay period and invest in a target-date fund that gives you exposure to the stock market but dials back your risk as you get older. “Target-date funds are one of the great innovations,” says Vanguard’s Kinniry.
* CONQUER YOUR FEAR. Sure, the stock market is confusing and scary at times. But you can’t take advantage of rising markets with your money sitting at the local bank in a savings account earning 0%.
* FREE UP SOME CASH. If you need to sacrifice and live a more frugal lifestyle to boost your 401(k) savings, do it, says Cohen of Old Dominion University.
*IMAGINE YOUR FUTURE SELF. “Many young people view their older selves heading into retirement as strangers,” and that disconnect is reflected in an “unwillingness to save,” and an emphasis on immediate gratification, Shlomo Benartzi, professor at UCLA’s Anderson School of Management, wrote a few years ago in a paper that discussed what he calls the “behavioral time machine.” The study found that people who saw digital images of what they might look like 30 years in the future said they would double the amount of money they put away for retirement.