Millennial investors are extremely bullish about U.S. stocks, but are, at the same time, fearful about the possibility of a correction, according to a Natixis Global Asset Management poll conducted earlier this year.
The survey found that while most younger investors believe the market will continue to produce its current high returns, they are also worried about their inability to protect themselves should a downturn occur.
Although the stock market has historically provided returns of around six to seven percent after inflation, investors notoriously tend to focus on recent performance, instead of considering longer-term trends. As a result, many Millennial investors expect to continue to see returns of 9.8% after inflation: 87% of the NGAM Poll’s respondents, in fact, thought it was realistic to expect those return to continue.
“Investor’s expectations for stock market returns are far too high” according to Kevin Noblet of the Wall Street Journal.
While most baby boomers, and Gen X’ers remember the plunge of ’08 very well, many Millennials do not. It has been six years since the markets bottomed during the financial crisis of 2009, so younger Millennials who have just begun working or investing have only experienced bull markets.
Allan Roth, the founder of an investment advisory firm and author of How a Second Grader Beats Wall Street, suggests we “overweight recent events and discount events that occurred years earlier”. This may help to explain why “so many investors felt fearless in 2007 and put so much in stocks, only to panic and sell after the 2008 plunge”.
The poll also reveals a disconnect between the high returns younger investors expect to be getting and their actual risk tolerance, with 73% of those surveyed reporting feeling conflicted between pursuing high returns and preserving capital.
Overly Optimistic but Extremely Risk Averse Investor Paradox
While Millennial investors have been extremely conservative with their investments relative to other generations, they have also shown a significant amount of optimism on their views of future stock market returns.
The returns on the market since 2009 may have given investors unrealistic views of the stock market’s long-term return potential while, at the same time, the crash that preceded this bull market may have made some Millennials overly conservative.
The Most Fiscally Conservative Generation
This highlights an interesting paradox created by the financial crisis: while many Millennials describe themselves as highly optimistic as a result of the returns they’ve seen after the 2009 recession, many of them are also overly conservative, with overweighted positions in cash or other conservative investments.
UBS has, in fact, referred to Millennials as “the most fiscally conservative generation since the Great Depression,” with the younger generation holding a significantly higher percentage of their portfolios in cash than older generations.
Millennials have already experienced two major bubbles – the housing bubble and the dotcom bubble – in their lifetime and have, in many cases, become concerned about significant market drops. This is reflected in ultra conservative portfolio allocations that “reflects wariness about financial markets” according to UBS. (8)
Finding the Middle Ground
Dan Kadlec, a financial journalist for Time Magazine, says that while “young adults have been the most conservative investors since the Great Recession… they are now cozying up to stocks at three times the pace of boomers.”
According to Manhattan Ridge Advisors, a wealth management firm based in New York, when coming up with an investment strategy investors need to take into account both the level of return they are hoping for as well as their tolerance for risk.
“The goal is to create a balanced risk/return profile that fits your current financial situation and goals, while generating the best possible return over the life of the investments.”
A realistic strategy for Millennials would be to find a middle ground between overly conservative and overly optimistic. While the stock market’s future returns are unknown, the current level of 9.8% above inflation is significantly higher than the S&P’s long-term historical average and isn’t a trend that can be counted on. Still, even with returns that are slightly lower than the current one, the market has still done well for realistic investors over the long run.
If you had invested in the S&P 500 at the beginning of 1985, 30 years ago, for instance, you would have had over 25 times what you put in by the end of 2014. The S&P 500 Index is representative of domestic markets and includes the average performance of 500 widely held common stocks. Individuals cannot invest directly into an index. The return information above is inclusive of dividends. Exclusive of dividends, the annualized growth rate is 12.31.
The important thing for investors is to recognize the risk and potential rewards that can come from different forms of investments and then to choose an appropriate asset allocation to reflect the level of risk with which they are comfortable.
The Silver Lining for Millennial Investors
One bright spot of Millennials’ response to the financial crisis is that they are much better at saving money and avoiding debt than previous generations.
According to the Wall Street Journal the total debt among young adults is at its lowest level in 15 years. Additionally many millennials seem to be doing a better job at saving money than previous generations with a significantly larger percentage reporting that they are good savers compared with those of either Generation X, or the Baby Boom Generation.
This helps explain why the Natixis poll found that 47% of millennials were very confident that they were on the right track for retirement compared with only 27% of baby boomers.
Another thing Millennials have on their side is time: Millennials have many productive years ahead of them to save and build their nest eggs. Getting advice from a financial advisor is a great way to help ensure a savings and investment strategy will be on target with how they are living now, but will also help ensure that savings grow to meet their individual long term goals.