Millennials and Saving

This might just surprise you…

By Allison Schmidt, Financial Advisor, CFP®, CPA

I’ll just get right to the point… according to the Legg-Mason Global Investment Survey, Millennials (those born between 1980 – 1996) are the most conservative investor generation.  Yes, you read that correctly, the entitled, the “everyone gets a trophy”, the mustache, and man bun generation are better savers than their older siblings (Gen X) or their parents (Baby Boomers).

They are the most conservative in terms of savings and investment allocation.  According to research done by the Chicago-based Northern Trust Asset Management, we’re seeing Millennials with the same conservative outlook as those born in the Great Depression, with 80% preferring capital conservation over growth assets.  It’s a stat that is consistent with our experience at HD Wealth Strategies and the millennial clients that we work with.

When you take a step back, it’s not all that shocking really. Millennials were born between 1980-1996 and witnessed at a young age the stock market crash by over 50%…TWICE! They saw their parents try to make ends meet with unemployment upwards of 10% and also likely entered the work force quickly before, after, or during one of the recent recessions.  Just 14% of the Millennials say they don’t have any savings, which is less than the Baby Boomers at 19%, and a whopping 25% of Gen Xers report having zero savings*.

Not only are Millennials saving more than the two previous generations, they’re also more conservative in their investments.  A 2014 UBS report revealed that Millennials held almost twice as much cash as any other generation in their investment portfolios with sentiment the same in 2016 thanks to volatile markets coupled with low returns, which provided little incentive to invest in stocks long term.  At the time of the survey, we had 24 months of volatility and ultimately flat markets (2014-2016) where a lot of diversified portfolios were posting a decline due to international markets’ declines.

All of this Millennial risk aversion can be a concern if you’re trying to retire some day.  Being more concerned with safety of principal in place of growth of assets in a 30 year retirement plan could prove troublesome over time because that portfolio will have a very hard time keeping up with the cost of living, let alone growth above and beyond just inflation.  It’s very difficult to save every dollar that you’ll ever need—your saved dollars need to grow.  For example a 100% bond portfolio from 1926-2016 averaged 5.4% return^, compared to an 80% stock/20% bond portfolio returned close to double at 9.5%^ over that same time period.  In terms of dollars, $10k invested over 30 years at 5.4% would turn into $459k; however, $10k invested in the 80/20 portfolio at 9.5% would yield 3 times more at $1.390M.  It’s amazing what compound interest can do over a significant period of time.

So to my fellow Millennials, I understand where you’re coming from.  There’s been quite a bit of volatility in the stock market in our adult lives to date; however, buckle your seat belts because we need the long-term growth. Volatility today in a well diversified portfolio, how ever unsettling, isn’t an issue for the long-term investor, despite how painful a 50% decline on paper can feel.  Inflation on the other hand could be the silent killer, harder to see and just eats up the purchasing power of your savings.  I would encourage you to take a look at calculated market risks to help you prepare for retirement.  It may feel good to look at the large balance in your savings account today, but the cost of that comfort will be devastating over decades.

Securities offered through LPL Financial, Member FINRA/SIPC. Investment Advice offered through HD Wealth Strategies, a registered investment advisor and separate entity from LPL Financial. Any of the entities shown are not affiliated with LPL Financial and HD Wealth Strategies. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted, including diversification, will be successful. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a nondiversified portfolio. Stock investing involves risk including loss of principal. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price. This is a hypothetical example and is not representative of any specific situation. Your results will vary. The hypothetical rates of return used do not reflect the deduction of fees and charges inherent to investing.

• 2017 Legg-Mason Global Investment Survey

^ Historic Average Returns obtained from Vanguard portfolio allocation models historic returns