Are Millennials getting a bad rap?
Image of a stock-leery generation might not tell the whole story
Millennials are falling short when it comes to investing for the future, surveys show.
But what this generation says in surveys, and what it does, are very different.
Fidelity Investments says Millennials are opening and funding IRA accounts at a faster rate than earlier 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,” a BlackRock 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 a just-released financial literacy survey from Stash, a financial app.
“What we have here is a classic mismatch between perception and reality,” Merrill Lynch’s Private Banking and Investment Group concluded in a report titled “Millennials and Money.”
Data from the Investment Company Institute, a trade group for mutual, exchange-traded and other funds, also debunks the idea that Millennials are way behind in investing compared with where Baby Boomers were at a similar stage in life.
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 30s, 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 Sarah Holden, senior director of retirement and investor research at ICI. She adds that 35% of Millennial households already own mutual funds vs. 48% of Baby Boomers.
And most investors in their 20s (60.4% at the end of 2014) are invested in target-date retirement funds through plans at work, the ICI says.
These funds, which often are 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, the decision of what funds to invest in and how much of a portfolio should be devoted to stocks or bonds was up to the individual investor.
“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-ityourself investors. Unlike their parents, most don’t receive company pensions from their employers 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 of them 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, such as Facebook and newly public Snap, known for its popular photo sharing app Snapchat. They also put money into low-cost exchange-traded funds, or ETFs, which track broad stock indexes such as 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 smartphones and other gadgets.
When Snap first sold shares to the public March 2, Millennials accounted for 38% of the buyand-sell activity online and via smartphones at Stockpile, a fintech firm that pioneered the use of gift cards to buy stock and caters to young investors (60% of its customer base is under 30). 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,” Stockpile CEO Avi Lele says. “It told us that young people know what it means to own stock. They weren’t buying a pack of bubble gum, they were buying part of a company, and they knew what it meant.”
Adds Stash 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.”