By: MICHAEL HOWELL
I must admit, I hate when others categorize my generation of Millenials with a broad brush. We’re regularly stereotyped as the pampered, lazy, underemployed tech savvy generation that doesn’t understand hard work.
Admittedly, we are rather tech-savvy. I’m certainly not a tech savant, but every time I visit my wonderful grandparents in Southern California, I’m hit up to fix some piece of technology that’s malfunctioned in their home. The wireless printer stopped working. A website doesn’t look right (because the web browser is zoomed in 400x and the images and text are cut off), or they inadvertently changed the home page on their browser and lost their favorite links. The best one though, and I’m willing to bet every Millennial has heard these words more than a few times: “What’s my password again?"
Look, we GET technology! By no means does that make us all computer science experts, but we were the beneficiaries of the Bill Gates/Steve Jobs effort to get the personal computer into the average American household. As for the other stereotypes, we can all recognize there’s a mixed bag of truth and fallacy in them. Fortunately for Millenials, the book isn’t written on us just yet.
It turns out; some Millenials have been financially savvy in their savings habits too. Although student loan debt and high unemployment persists as a significant headwind, a positive economic trend has developed among those Millenials that have managed to find work.
Millenials have begun saving for retirement at a median age of 22 - More than a decade earlier than the Baby Boomers, and five years earlier than Gen Xers. [i]
It would appear many Millenials have in fact been paying attention to what older generations have been telling them! As I reflect on this trend, the figures aren’t altogether surprising.
Most of us were graduating from college or in the early years of our careers during the Great Recession. We witnessed the consequences of an over-leveraged population of Americans burdened by credit card debt and owning homes that were, generally speaking, far larger than household income could support when stress tested. Shrunken retirement portfolios, job loss, and home foreclosures rocked the worlds of people we care about. Moreover, the issues plaguing the Social Security system have caused many Millenials to plan as though they’ll never receive a benefit.
So again, for the few Millenials that have managed to find work, it seems the advice has been followed: Save early, safe often, and live frugally.
I entirely applaud the basic elements of this advice, but I’ve also discovered a missing layer to the story. According to a recent report from UBS Investor Watch, the risk tolerance of Millenials is extremely conservative, with 52% of the average investment portfolio allocated to cash. [ii]
Although Millenials have been excellent savers, I fear the dramatic market volatility we’ve witnessed in recent years has resulted in us being far too timid. This lack of conviction and willingness to take on risk in the markets is certain to have repercussions in later years if this line of thinking isn’t addressed for a number of reasons:
First, it reflects a collective leeriness over investing in stocks.As volatile as stocks can certainly be, continued investment in the growth of successful companies helps drive our economy forward, and stocks have statistically been the best investments over long periods of time.
Second, meaningful stock exposure is most advantageous for any young person, and is in fact necessary to build up a sufficient nest egg for retirement.With advancements in healthcare, Americans are already experiencing 20 to 30 year retirements, and Millenials are expected to live even longer than their predecessors. Millenials need stock exposure to grow their retirement accounts, but best of all they have the luxury of timeto ride the rollercoaster of volatile markets and take advantage of buying opportunities when prices are low.
Last, it exhibits a focus on the “short-term” rather than the “long-term” with respect to saving and investing. It’s a prudent move for all families to establish some liquidity and build up an emergency reserve worth 3 – 6 months’ worth of monthly expenses. This makes it far easier to stomach the ups and downs of market gyrations. However, in retirement and investment accounts, Millenials keeping a significant position in cash at a young age reflects little more than fear of what the market is going to do. Investing on fear is a dangerous recipe, where emotionally charged decisions can lead to financial catastrophe.
So briefly, the following are some simple pieces of financial advice for my fellow Millenials:
Take Advantage of Time
If you haven’t started saving, start now! It’s never too early or too late to get started, but there are substantial investment benefits to starting early.Understand the power of compound interest. Time allows interest to compound on top of itself, and the longer you allow it to compound, the larger the growth of your investment. Begin to develop a long-term mindset with your investments. When markets go down, ask yourself if you’re going to retire in the next few years. If you’re not, the wise but counterintuitive move is likely to open your checkbook and invest more while prices are low.
Continually Invest& Automate the Process
Make it a habit to invest a fixed amount of money every single month and automate the process through your bank. Investing a fixed amount at the same time every months means you’ll invest when the market is high as well as when it’s low. This will lower your average investment costs over time and means you won’t have to worry about getting the timing right on when to invest. Also commit to doing this right after you receive your paycheck. Of course, don’t invest more than your budget can withstand, but you’re more likely to invest more after getting paid than waiting to invest with the leftovers after paying down monthly expenses. Form good investment habits now, and they’ll carry forward with you for the rest of your life.
Diversify, Diversify, Diversify
Diversification is a core investment principle that originates from biblical wisdom, and this advice has stood the test of time.It’s important to understand what you’re investing in. Buying a single, individual stock carries more risk than owning one hundred stocks. Why? Because you can break a single pencil, but you can’t break one-hundred pencils tied together. These days, it really isn’t difficult to diversify by purchasing mutual funds and exchange-traded funds (ETF's), which are generally invested in hundreds of stocks and/or bonds at a given time.
These are just a few simple principles that will move you down the path toward becoming a wise and successful investor.
Michael Howell is a Registered Representative with LPL Financial, member FINRA/SIPC. He can be reached at (209) 526-9426.
[i] TransAmerica Center for Retirement Studies (2014). Millenial Workers: An Emerging Generation of Super Savers.
[ii] UBS Investor Watch Report (2014). UBS Investor Watch Report Reveals Millenials are as Financially Conservative as Generation Born During Great Depression.