Much is known about marketing to the millennial generation with their attachment to their cell phones, their pastime with computer games, and their social habits. This has helped to create the enormous cell phone industry with all it’s various communications methods and applications. But what does all this mean to millennials when it comes to investments?
Millennials control less wealth than baby boomers did: Currently Millennials control only about 9% of total wealth assets. Compare that to 26% control that the baby boomer generation had during the same age period. However, they stand in line to reap the benefits of inheritance from the baby boomer generation. By contrast this could put millennials in line to receive more investment dollars at an earlier age than most baby boomers. Further, advances in technology, particularly with cell phone apps, enable the millennials to make trades much easier than the boomers, who generally had to place a call in to their brokers to get a trade executed.
Millennials will have more leeway with investment choices: The millennial generation will not have the same restrictions that the baby boomers did with pensions that were defined benefit oriented meaning that the payout was fixed based upon the participant’s salary. With the advent of the 401K plan in corporate American, pensions dollars shifted to a defined contribution basis, where the beneficiary has more leeway to choose how the assets are invested.
Technology makes it all easier: Technology makes it easier for millennials to invest in stocks, bonds, mutual funds, ETF’s, and other securities. Thanks to technology, younger investors have a library of applications they can use to make racy, and risky bets on such things as derivatives, short-sales, options, commodities, and other risky instruments. Using cell phones, younger investors can engage in day trading easily while at work, at lunch, or break time. Further, they are able to execute a trade within seconds of deciding what course of action should be taken. Contrast this to baby boomers who by and large were less likely to be active traders since they generally needed to transact all their trades through a broker. For the most part, the boomer generation did not always have access to the latest transaction prices when contemplating a trade. This is never a problem in the computer age.
Robo-advisors: Technology also provides millennials an easier way to allocate their resources by way of “robo-advisors”, that perform this allocation automatically based upon criteria that the millennial investor provides. The most common investment instrument selected by robo-advisors is low-cost index funds which are balanced according to the investor’s age and risk preferences. Ironically, the future may not be bright for those robo-advisors, as the millennials might one day need to withdraw the money for reasons other than retirement. A house for a family, and college education for kids often delay or inhibit retirement savings until later in life. Should that time be reached by the millennial generation, the robo-advisors might find that that they could be out of business before they can attract the next younger generation to participate.
Investing goal for millennials: Will millennials maintain the same investing goals as the baby boomers? What about climate change, greenhouse emissions, polluted oceans, and other environmental matters that appear to attract a lot of interest on the part of millennial investors? As much as 87% of millennials believe that corporate success should not be restricted to good financial performance. Millennials have been known to sell securities that perform adequately from a financial perspective if the management’s behavior is environmentally unfriendly or socially unsustainable.
Conclusion: All in all, can we expect the millennial generation to invest the same way as the baby boomers did? The biggest wildcard is technology — not strictly as an investment, but what technological advances in today’s world have done for investors. But technology cannot replace good decision making when it comes to choosing investments. Having the instant ability to trade derivatives can also end up making the young trader look like a rookie. I expect to see the millennials invest more in environmentally friendly business activities. Whereas, the boomer generation might have been more interested in oil, airplanes, and gas guzzling vehicles.
Sources: The Generation Game, The Economist, October 24th, 2020.
David, I believe I am correct in saying that only 14% of US population owns individual stocks and only 50% are invested in the stock market in anyway (401K, IRA etc.). With interest rates almost at zero for savings, what will the 50% without any investing options do?
That’s a hard one to answer. We Americans are a highly consumptive society that has an average household credit card debt of $7,000 to $10,000. Fortunately, many in the boomer generation have homes that have equity, which oftentimes resulted in the only major asset they have. The millennial generation will be waiting longer to get into a house, will pay significantly more for it, and likely take more time to pay the mortgage off. Worse, I can picture millennials borrowing against any equity they accrue with their homes disregarding that they will lose their value in the workplace one day and need to retire. But any investment plan must begin with savings meaning spending less money that the individual earns.