Millennials are not into buying stocks
Aftermath seems to have left them with significant risk aversion
Their experience of the worst financial crisis since the Great Depression scarred them deeply, though it is not known yet if this psychological damage is permanent, evidence gathered by researchers for the Vanguard Group suggests. |
What has happened to the generation of investors that came of age in the middle of the worst financial crisis since the Great Depression? The evidence suggests their experiences scarred them deeply, though we don’t yet know if this psychological damage is permanent.
That is the conclusion of a white paper by Vanguard Group, entitled Risk-Taking Across Generations. You may have missed it when it was first published in June (I did), but it is worth considering in light of its huge data set.
The low-cost investing giant analysed 4 million Vanguard retail investor households, and although many of the findings were pretty run-of-the-mill, some details were shocking. The most stunning conclusion: Young adults who started investing with Vanguard after the financial crisis are more than twice as likely to hold no stock as those who began investing before the crisis struck.
Indeed, almost a fifth of millennial investors had no money in equities, and thus are missing an opportunity to take advantage of the multi-year bull stock market run.
Millennials, or those born roughly between 1981 and 1996, are now 22 to 37 years old. This implies an investment time horizon of 30 to 45 years, before reaching age 67. That suggests they should hold a larger share of equities than the traditional portfolio mix of 60 per cent equities and 40 per cent bonds.
It seems likely that this demographic group has been profoundly affected by what its members witnessed and experienced during the 2007-09 bear market.
Conservative approach
That searing event probably has led them to adopt a much more conservative approach than is appropriate or justifiable for their age. This seems to parallel the impact on the psychology of the generation that experienced the Great Depression.
The lack of job security that came with the financial crisis, along with the 57 per cent peak-to-trough collapse in the Standard & Poor’s 500 Index, had a big impact.
There are some mitigating circumstances around this lack of equity exposure for this demographic: Many are carrying crushing student-debt loads.
Rising rents have also had an impact. As a result, millennials on average have been forming households and getting married later than earlier generations. Marriage and children have a way of making people become more serious about longer-term financial planning — including investing. Still, the four million accounts Vanguard looked at were those who have already begun investing.
It wasn’t considering the millions of millennials who don’t invest at all. Unless this changes, it could add up to a retirement crisis for the generation that came of age during the financial crisis.