In recent months there have been a number of articles about the habits of Millennials. They aren’t buying homes, they don’t have pets, and they seem to love plants. They are not apparently interested in the same things that earlier generations were obsessed with. It has those with money worried. I’m sure they are concerned about how to maximize their money with a group of people whose interests they can understand.
An article in this morning’s Bloomberg headlines, “Millennials Are Making a Costly Investment Mistake”. It goes on to say that Millennials are saving cash in various almost forgotten instruments like savings accounts, certificates of deposit, or under the mattress. The rate of return for any of those averages less for their generation than the rate of inflation, so over time they are losing buying power.
One third of Millennials are saving cash compared to 20% of Baby Boomers. Furthermore, most Millennials don’t know what interest rate they are getting, whereas most Baby Boomers do, and the Baby Boomers tend toward having cash savings products that either break even or slightly outpace inflation.
When I was the age of the Millennials I put money in a passbook savings account and then bought a few shares of stock from the savings account at the urging of my mother who was more savvy than my Dad about investing. When I had a real job and needed to invest, the advice I got from brokers was self-serving and I consequently made some awful investments. When I went to investment managers they told me to come back when I had a million dollars to manage.
Eventually, we got an investment manager to take interest in our medical practice investments as a group and I learned the basics of investment strategy. Investment strategy depends on asset allocation and diversification. The intent is to spread risk out over a number of types of investments, and to make sure that you don’t get too heavily invested in one sector. For example, if you use mutual funds and you have money in large capitalization growth funds and small capitalization growth funds you may find that the small cap funds have done very well and you are “out of balance”. At that point you would sell off some of the small cap funds and take those profits and put them into your large cap funds because you know that, over time, the large cap funds will do well again.
I learned before anyone got interested to spread the risk out, and never had more cash in my portfolio than was necessary to move money around.
So, what is the alternative to this approach? The alternative is market timing. Sit on the sidelines with cash and wait for a sector, or the whole market, to do poorly then invest in that sector and sell when it has maximized profit. Sounds great, doesn’t it. The problem is timing. If this was the way to get rich everyone would do it and there would be no investment managers.
That may be what the Millennials are doing. They may be looking at a really oversold market at the end of a really long bull market, with an unstable president careening toward disaster, thinking of the market crash of 2008, and imagining that they will wait until the market crashes again before getting in.
Or, alternatively, they may just be working, socializing, and taking the simplest road to investing, totally clueless about the advice of pundits.
I really don’t know, but I’m guessing the latter given that young people feel invincible and death and old age look vanishingly far away.
I don’t think they are doing worse than older generations did. They are just dealing with life as it comes.
A friend likes to point out that we are deterministic beings living in a probabilistic world.