Millennials are avoiding stocks in favor of holding on to cash, and it’s a problem.
The best advice to give 20-somethings who are starting retirement accounts for the first time is to invest as much as their risk tolerance allows in stocks, regardless of market swings. The long-term investment horizon for a young adult will experience the wonders of long-term compounding.
However, more and more millennials are shying away from stocks at precisely the time when they should be investing.
The financial and market trends set by millennials, the generation born between 1980-2000, differ from other age groups. They are entering their prime spending years and setting themselves up for either financial success or financial frustration in the future.
Though nearing an age at which they should start investing in retirement or buying a house, many millennials are just not engaging. They are missing the value of long-term compounding, and setting themselves up for financial struggle when they approach retirement age.
What percentage of millennials do own stocks? Surprisingly, only 26% of people under the age of 30 own them. Millennials aren’t just avoiding stocks. They are not investing in anything, electing to sit on cash instead.
Baby boomers, who are closest to retirement, are twice as likely to own stocks.
Why Do Millennials Turn Away From Stocks?
Many millennials have been burdened by an enormous amount of debt at a young age, with student debt reaching new heights in recent years.
Older millennials entered a tough job market after graduation. Many millennials lack the money to invest, preferring to pay off debt than set money aside for the future.
Millennials have also been witness to two financial downturns, the dot-com bubble in the late 1990s and the more recent financial crisis. Many would-be investors lost confidence in the stock market. Goldman Sachs (NYSE: GS) conducted a survey that discovered that only 18% of young adults trusted the stock market “as the best way to save for the future.”
This group also lacks confidence in their investment knowledge. Some 93% of millennials say they distrust the markets and lack the financial knowledge to invest, according to a Capital One survey.
Advisers Forced to Think Differently
While advisers typically recommend twenty-somethings allocate anywhere between 60% to 80% in stocks, they have to understand the risk tolerance of skeptical millennials is low, despite their long investment horizon. Many advisers have been starting millennials with a more moderate portfolio until they have experienced one or two bear market periods.
Millennials also are moving away from the assets-under-management fee with advisers. First, it isn’t plausible for a person who has few assets to manage.
Second, millennials are accustomed to paying monthly fees for services, from Netflix (NASDAQ: NFLX) to Spotify to gym membership. For them, a retainer fee makes sense, and advisers welcome the subscription-based approach for millennials who are looking for more than asset management. Many millennials want budgeting and cash flow advice from advisers.
However, millennials should be wary of the retainer fees. Any returns can be quickly eaten by that retainer fee.
That leads to the next emerging trend: robo-advisers.
Why Robo-Advisers Appeal to Millennials
Millennials are a generation that grew up surrounded by technology. They have trusted apps to help them lose weight, remember to do homework, or make a recommendation for a restaurant. They also trust technology to help them manage their money.
A robo-adviser is an automated digital investment adviser. There are numerous startups that are sprouting up to cater to this new area of investing. Robo-advisers create allocations and rebalance a portfolio for a fraction of the cost of the traditional wealth adviser.
Now is the Time for Young Investors
While the recent volatility can be concerning to new investors, millennials need to realize that sitting on cash isn’t going to help them in the future. A key fact to remember: Over the past 30 years the Dow is up more than 1,100%, despite the recent market volatility.
That means, if a millennial invested $5,500 in a Roth IRA (the current maximum contribution for people under 50) in a Dow index fund and never touched it again, at age 55 it would be over $60,000.
That is the time value of money!
For millennials who have been sitting on the sideline, now is the time to begin investing and take advantage of the recent selloff.
Give your millennial friends, children, and grand-children this piece of valuable investment advice: get off your cash assets and invest in stocks.
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